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Unfair contract terms regime extended to small business contracts

The Fair Trading Amendment Act 2021, which was passed into law in August, bans unconscionable conduct in trade and prohibits businesses from having unfair contract terms in their small business contracts.

The Act amends the Fair Trading Act 1986 in two key ways.

  1. Unconscionable conduct: The legislation prohibits unconscionable conduct in trade. It does not define what ‘unconscionable conduct’ is, but it does provide a list of factors for the court to consider when assessing unconscionable conduct, including:
  • The relative bargaining power between the person engaging in the conduct and the person affected by the conduct
  • The extent to which the trader and an affected person acted in good faith, and
  • Whether unfair pressure or undue influence was used.
  1. Unfair contract terms: The Act extends the existing protections against unfair contract terms in standard form consumer contracts to include small business contracts.

The legislation defines this as a contract for the provision of goods or services between businesses where the value of the relationship between the businesses is less than $250,000 (including GST).

These two changes will come into force on 16 August 2022. This gives businesses just under one year to review their small business contracts to ensure they comply with the new requirements. The Commerce Commission is expected to release guidance on what unfair terms might look like for small business contracts.

Be aware, however, that some minor changes in the legislation are already in force.

If you would like some guidance on how this legislation affects your business, please feel free to contact us.

Many welcome new sick leave provisions

One employee’s sick leave may have doubled, but another employee’s sick leave may still only be five days. How does this work?

On 24 July 2021, minimum employee sick leave entitlements increased from five days to 10 days per year[1]. Key points for employers are below.

When does the entitlement start? Not all employees will get the increase in sick days at the same time. Employees will get an extra five days’ sick leave when they reach their next entitlement date. This is either after they reach six months’ employment or on their existing anniversary.

For example, if your employee’s anniversary date was 10 June, they become entitled to 10 days’ sick leave on 10 June 2022, but until then, their entitlement remains at five days.

What remains the same?

  • Employees who already get 10 or more sick days a year will not be affected by this change
  • The maximum amount of unused sick leave that an employee can be entitled to accrue remains at 20 days, and
  • The change applies to all employees whether they are full-time or part-time.

Remember, it’s your obligation as an employer to ensure you’re aware of your employees’ entitlements.

Changes to the retention money regime for construction contracts

The new Construction Contracts (Retention Money) Amendment Bill proposes to change the way contractors hold retention money under construction contracts.

The current regime allows contractors to mingle retention money with working capital, which can result in subcontractors missing out on money owed to them if the contractor goes into liquidation. This happened in the liquidation of Mainzeal Property and Construction Limited in 2013.

The proposed legislation aims to put clear rules in place around how retention money is to be held to provide protection for subcontractors.

Key changes: The Bill proposes that contractors must:

  • Place retention money on trust as soon as possible and keep it separate from other money or assets, and
  • Hold retention money in a trust account in a registered bank in New Zealand or in the form of complying instruments (such as an insurance policy or a guarantee).

The Select Committee is expected to report on the Bill in November 2021. Contractors will need to be prepared for the changes when the Bill passes, as failure to comply could result in significant fines.

[1] Holidays (Increasing Sick Leave) Amendment Act.


Could it happen in New Zealand?

The American entertainer Britney Spears’ conservatorship has recently been in the headlines. She is asking American courts to reconsider the conservatorship which has been in place for some years.

A conservatorship is like a guardianship in New Zealand — a court puts a legal arrangement in place to give a third party control over a person’s affairs if they lack mental capacity in some way.

Britney has claimed that her conservatorship has:

  • Forced her to work, against her wishes, for a number of years
  • Enriched her conservators, who are paid a substantial income, and
  • Prevented her from taking control of, or making decisions about, her own life.

In mid-August, Britney’s father stepped down from his role as conservator; he will work with the court in the appointment of a new conservator for his daughter.

Could this happen in New Zealand?

Many people in New Zealand have Enduring Powers of Attorney (EPAs) that allow them to decide in advance who will take control of their affairs if, or when, they lose mental capacity. It is when a person does not have EPAs that the Family Court will often become involved and can appoint people to make decisions on that person’s behalf. These kinds of appointments are common in New Zealand. However, there are many safeguards, as set out in column 4 of this article, that ought to prevent the kind of abuse Britney claims to have suffered.

The Protection of Personal and Property Rights Act 1988 (PPPRA) allows the Family Court to intervene in relation to a person’s personal care and welfare (where they live, medical treatment, etc) and in relation to their property. The court can only intervene when medical evidence shows that a person is unable to look after themselves, including making decisions about their future and their property.

The PPPRA contains what is known as the ‘minimum intervention principle.’ When making orders, the court is required to make the least restrictive intervention possible in a person’s life. Any orders which are made must enable that person to exercise and develop any capacity they may have, to the greatest extent possible.

Personal care and welfare

The Family Court can make specific decisions about a person’s care and welfare, such as directing that they live in a certain place or it can appoint a welfare guardian.

Appointing a welfare guardian is a significant restriction on a person’s autonomy; an appointment will only be made when a person wholly lacks capacity or does not have the ability to communicate, and when there is no other satisfactory way to ensure decisions are made. If a person only partly lacks capacity and can communicate their preferences, the court can only make specific orders about their welfare, such as an order that they live in a certain place or receive certain medical treatment. It cannot appoint someone to make all decisions.

Property

The Family Court may appoint a property manager when a person wholly, or partly, lacks capacity to manage their own affairs in relation to their property. However, s25 of the PPPRA, states that a person does not lack capacity simply because they make, or intend to make, imprudent decisions in relation to their property.

When appointing a property manager, the court considers the minimum intervention principle. It can appoint a manager in relation to only some part of the person’s property, rather than in relation to all the property the person holds. It can also give limited powers to a property manager. There are a number of restrictions on a manager making decisions about property worth more than $120,000.

Unless the court approves, property managers are not allowed to be paid. If a fee is paid, this would usually be very limited, even for a professional manager, such as a trustee corporation.

A property manager or welfare guardian cannot force a person to work, and if either of those people signed a contract requiring the person to work against their wishes, the person could ask the court to review that decision and/or appoint different managers.

Safeguards

The PPPRA has a number of safeguards built in to protect the person. Each time an application is made to the Family Court for orders under the PPPRA, the court must appoint a lawyer (usually state-funded) to represent that person’s interests. That lawyer has duties to:

  • Contact and meet with the person
  • Explain the nature and purpose of the application
  • Ascertain that person’s wishes, and
  • Evaluate possible solutions, including the minimum intervention principle.

The appointed lawyer represents a significant safeguard, and is present every time a PPPRA case is before the court. They report to the court on what the person wants and their capacity.

They can propose a new capacity assessment if, for example, they think the person has become capable of managing their own affairs.

In addition to this, welfare guardianship and property orders must be reviewed every three years (in some cases, every five years). The court reviews the matter, usually obtains an updated capacity assessment, and appoints a lawyer to act for the person and reports back to the court.

Britney in New Zealand?

It seems less likely that someone in this country would end up in Britney’s position. If Britney lived in New Zealand and was subject to the PPPRA, the court would review her situation every few years, and her views would be put forward by an independent lawyer. If Britney thought she had capacity, the court could order a medical review. If Britney wanted control of her own affairs, or a different person in charge, the court would be obliged to take this into account. There are a number of safeguards built into the New Zealand system which would help prevent Britney’s current situation in the US from arising.


Over the fence

Climate Change Commission: carbon farming

On 31 May, the Climate Change Commission provided Parliament with its final advice on the New Zealand Emissions Trading Scheme before the government sets the first of three emissions budgets later this year. In this advice there was significant consideration on land use and the impacts of afforestation.

The Commission recommended the Emissions Trading Scheme be amended to manage exotic afforestation and provide assistance for local government in mitigating the local impacts of afforestation.

If the government implements the Commission’s recommendation, carbon farming returns for planting exotic trees, such as Pinus, will decrease, while the carbon farming returns for planting native forest blocks will either remain constant or increase.

With a large proportion of carbon sinks across New Zealand planted in Pinus, this will have an impact on both existing forestry blocks and blocks that will be planted in the future. The Commission has instead shifted its focus to reduce gross carbon dioxide which is largely produced by burning fossil fuels.

We will watch how the Commission’s recommendations progress during the year, and will provide more information as it comes to hand.

Dairy worker border exception process

In order to address an acute shortage of experienced dairy sector workers, in June the Minister of Agriculture approved a Class Border Exception for 200 migrant dairy farm workers, along with their families, to enter New Zealand. There were 150 positions available for herd managers or assistant farm managers and 50 farm assistants. In addition, 50 general practice vets (and their families) were granted exemptions to enter New Zealand.

An assistant farm manager must earn over $92,000pa and have at least two to four years’ work experience; herd managers must earn above $79,500pa. Farm assistants must earn above the median wage which is classified as $27.00/hour and roles must be in regions that have acute shortages of dairy sector workers.

All workers must come into New Zealand before April 2022. Employers must make a commitment to pay the costs for Managed Isolation and Quarantine (MIQ) and pay their worker’s salary whilst they are in MIQ.

It is estimated that the workers will be on the farm approximately 17 weeks from the initial application.

What is a ‘state of emergency’?

In late May, the mayors in mid-Canterbury declared a local state of emergency due to the significant flooding affecting the region. Then, in mid-July, a local state of emergency was declared in the Westport area. Many people are curious about what this entails and to understand the powers given to the authorities in a local state of emergency. We explain…

The Civil Defence Emergency Management Act 2002 defines a local state of emergency as a declaration by an authorised person, such as a mayor or the Minister of Civil Defence, that an emergency has or is likely to occur within an area. A local state of emergency lasts for a minimum period of seven days from the date and time of the declaration.

The local civil defence group (which includes emergency services, police and volunteers) is then deployed who may, for example, set up first aid posts, provide shelter to those affected and assist with the rescue of people in danger. In a nutshell, a local state of emergency allows the authorities to protect people and the community.

Most importantly, the leader of the civil defence group has the power to enforce the evacuation of an area, authorise entering a premise to save lives and enforce road closures; all of these were implemented when Ashburton’s stock banks were at risk of breaching the township and Westport was flooded.


Climate Action Toolbox

We all need to do our bit to reduce carbon emissions and look after the planet better than we have previously

In late March, the Climate Action Toolbox was launched in a major collaborative effort involving the Sustainable Business Network, a number of government agencies and some private sector businesses.

The Climate Change Commission had identified a need for tools to help smaller businesses take action on climate change. Its goal is to help businesses create a tailored step-by-step plan they can use to reduce emissions.

Many small to medium-sized businesses want to do their bit, but are unsure on how to start or what could make the most impact. The Climate Action Toolbox provides tailored advice and support around moving people, moving goods, office operations, site operations and equipment, and designing and making products.

Businesses can work through a self-assessment to identify which areas are relevant to them. Under each area you can choose from a range of specific actions to improve the climate impact of your business. Activities range from limiting non-essential travel, using heating and cooling options efficiently, buying sustainable products, recycling and reducing what goes to the tip, buying products produced locally, using equipment efficiently and upgrading to cleaner technology where possible.

To find out more about how your business can reduce its carbon footprint, go here.


Postscript

Mature workers toolkit

The government’s business website has launched a ‘Mature workers toolkit’ to help employers to get workers aged 50 years-plus into small to medium-sized businesses.

The toolkit has a range of guidance, support tools and resources that employers can use to help attract, recruit and retrain mature workers. It includes:

  • A worksheet to help write compelling job advertisements
  • A build-your-own-policy for on-the-job learning
  • Tips on leading and working with mature workers, and
  • Case studies.

With more people working later in their lives, it’s important that the skills and knowledge of mature people are retained in our workforce. Seek NZ’s May Employment Report shows the demand for staff continues to increase. “Job ads increased by 5% month-on-month and are almost triple the volume that they were this time last year,” reports Seek NZ.

Fifteen per cent of our population is aged over 65; this is expected to increase to 20% over the next 20 years. It is important that the value this group of people gives to business is acknowledged not only by employers, but also by their staff.

To find out more, go here and search for Mature workers toolkit.

Bright-line test extended to 10 years

In March the bright-line test was extended to 10 years.

The bright-line test was established in 2015 to tax the profit made on selling residential property where sold within two years of purchase. The bright-line period was extended to five years for properties purchased from 29 March 2018.

Now, if you have a binding agreement to purchase on or after 27 March 2021 and you sell the property within 10 years, any profit will be subject to income tax.

For residential properties that are ‘new builds’ the five-year period still applies. Rules are currently being developed about which new builds qualify for the shorter bright-line period.

Do note however, in most (but not all) circumstances your family home is exempt from the bright-line test. The March 2021 announcement also saw changes as to how the family home exemption is calculated for properties subject to the bright-line test.

To know more about the bright-line test and how it may affect you, please feel free to contact us.


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.


Property briefs

Government housing package: other notable points

The big ticket items of the government’s recent housing package included the extension to the bright-line test as well as landlords no longer being able to offset their tax with interest paid on their rentals. We have covered these two items here.

There are, however, a number of other features of the package that may make it easier for New Zealanders trying to get onto the property ladder and to help increase the housing supply.

Increases to income and price thresholds for First Home Grant

Since 1 April 2021, more New Zealanders can qualify for government assistance to buy their first home. Income thresholds for singles applying for the First Home Grant have increased from $85,000 pa to $95,000 pa as well as an increase for a couple’s combined income from $130,000 pa to $150,000 pa.

Similarly, the price thresholds for both new homes and existing homes in many areas of the country have also been increased. With the rapid rise in house prices leaving the scheme’s original house price caps desperately out of kilter from the real-time housing market, first home buyers have suffered. Some had to rely on parents for additional funding or others have been completely priced out of their local housing market where prices had risen well above the threshold for government assistance.

The increases vary between regions and differ depending on whether you are looking to buy a new or existing home. There is a full list of the changes to the house price thresholds in your region here. With more people now being eligible to apply for the First Home Grant to subsidise the purchase of their first home, we hope that more Kiwis will get the assistance they need to help get them on the property ladder.

Housing Acceleration Fund

Property developers will also get a helping hand from the government’s housing package. A $3.8 billion boost to development has been announced and will subsidise the cost of providing services and infrastructure to ‘build-ready’ land. In subsidising these significant upfront costs which often slow housing development, the government hopes to increase the supply of a range of affordable, public and mixed housing.

The Housing Acceleration Fund is available to a range of key stakeholders in both the private and public sector but it will rely on local government playing its part in opening up suitable land to allow more housing development projects to take place. Developers involved in housing development should speak to their local council first for more information about whether they are eligible for assistance from the fund or for what stages of housing development the fund is available.

Kāinga Ora Land Acquisition

The government continues to support affordable housing by lending Kāinga Ora an additional $2 billion to assist with land acquisition for social housing development projects. The increased capital is expected to see the rate of acquisition of land increase which, along with the funding boost for development of public and mixed housing, aims to increase the supply of housing across the country.

Apprenticeship Boost

Finally, the apprenticeship subsidy scheme (Apprenticeship Boost) is extended for a further four months. Employers taking on apprentices can access a $1,000 per week wage subsidy for first year apprentices and $500 for second year. This extension will help ensure that enough skilled tradespeople are trained to take advantage of the government’s plans to increase housing supply by not only enabling a greater workforce to achieve the government’s affordable housing goals, but also by providing private developers with a sufficient pool of skilled workers to draw on to keep up with housing demand.

Whether you are a first home buyer trying to find your feet in the property market, a property developer looking for a financial boost to kick-start your latest housing development project or an employer with apprentices, the government’s housing package will help address the supply issues affecting the housing market and will give a financial leg-up for those working to increase supply.



Business briefs

Mainzeal: lessons for directors

Mainzeal Property and Construction Ltd was a New Zealand construction company placed into liquidation in 2013. The liquidators brought proceedings against the directors of Mainzeal, alleging a breach of directors’ duties, including reckless trading and allowing Mainzeal to take on obligations that the company could not perform. The High Court found the directors were personally liable for reckless trading. The decision was appealed to the Court of Appeal.

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