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What proposed change to commercial leases will mean for tenants and landlords

Both parties to negotiate “fair” rent reductions
By Raj Gurusinghe

A proposed change to commercial leases will entitle many businesses in need of support due to the pandemic to rent relief. The change involves negotiating a fair reduction of rent when the tenant does not have access to their premises because of lockdown and alert level restrictions.

One thing is certain, both tenants and landlords will have to negotiate in good faith at a time when many businesses are faced with reduced – or no – income.  

Most commercial leases include a process where landlords and tenants agree to a reduction in rent if access to their premises is restricted by Government imposed Covid-19 lockdowns. For example, clause 27.5 of the 2012 Auckland District Law Society (ADLS) Lease contains a “no access in emergency” clause.

As part of the Government’s Covid-19 Response (Management Measures) Legislation Bill, a similar “no access in emergency” clause will be included into leases that do not currently contain this provision.

If the Bill passes into law, the proposed clause will apply to leases that are in operation from 28 September 2021 (the Effective Date).

The other criteria where the new clause will apply are:

  • If there is an epidemic and the tenant is unable to gain access to the premises to fully conduct their business
  • For a rental period “all or any of which” starts on the Effective Date

The drafting of the final point is not entirely clear in the Bill. However, it suggests the clause could refer to any rental period that includes the Effective Date (i.e. if rent is paid monthly, rent relief could be sought for the entire September period).

If the criteria is met, the landlord and tenant will need to agree to reduction of “a fair proportion” of rent. The key question is: What is “a fair proportion”?

Despite submissions calling for the inclusion of specific criteria relating to what amounts to “a fair proportion”, the select committee’s view was that listing considerations risked restricting what could be taken into account when determining a fair rent reduction.

The only guidance the Bill provides is that any agreements reached by the parties for reduced rent in relation to the period since 18 August 2021, when the country went into alert level 4, must be considered.

In Haigh Lyon’s experience, working with clients to negotiate clause 27.5, and what “a fair proportion” is, depends on a range of factors including:

  • Whether the business can continue to be conducted remotely without access to the premises
  • Whether the premises serve any other purpose, such as equipment being able to be stored at the premises
  • If there are any mortgage obligations
  • If there is any financial assistance available to the parties
  • To what extent the tenant’s financial position has, and continues to be affected by the pandemic

Both parties can agree to exclude the clause however this must have been agreed on, or after, the Effective Date.

The Government specifically invited submissions on the Effective Date with many submitters expressing concern about the date because it:

  • Did not cover the majority of the current alert level 3 and 4 restrictions
  • Should be backdated even further and apply to lockdowns in 2020 and earlier in 2021
  • Should not be retrospective

The select committee did not make a definite recommendation on the Effective Date, only stating that it should be considered further by Parliament.

Understandably, dealing with complex negotiations at a stressful time for both landlords and tenants is difficult. However, if a lease is likely to be affected, the best approach is to keep the lines of communication open and to carefully consider each parties negotiating position, rights, and obligations under the lease.

Haigh Lyon can provide advice on the proposed change and potential impact on existing leases and those currently being negotiated. Contact Raj Gurusinghe on  or 09 306 0629.

How companies can navigate new Fair Trading Act amendments

Changes to Unfair Contract Terms are a key consideration for all businesses

Changes being introduced to the Fair Trading Act in 2022 are designed to protect and give more power to small businesses when negotiating contracts and conducting business. Triggered by the Fair Trading Amendment Bill 2019 which was recently passed by Parliament, changes to the rules around unfair contract terms (UCT) will protect businesses that have a limited opportunity to negotiate the terms of a trade contract.

Under the Bill the UCT provisions will extend to business-to-business contracts (B2B Contracts) with an actual or expected annual value of up to $250,000. Currently the UCT provisions apply only to standard form consumer contracts.

To ensure compliance before the changes come into effect on 16 August 2022, businesses should conduct a careful review of their B2B Contracts.

A contract term is an UCT if it:

  • Would cause a significant imbalance in the parties’ rights and obligations under the contract.
  • Is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by it.
  • Would cause detriment (whether financial or otherwise) to a party if it were applied, enforced, or relied on.

By way of a practical example, a term in a B2B Contract which allows one party to make unilateral changes to the contract (without the other party being provided a similar right) may be considered an UCT. Similarly, a term that enables only one party to renew, vary or terminate the contract, or a term that penalises one party only for breaches of the contract, could constitute an UCT.  

If a term is declared an UCT, and is used again, the term will be void and the business may be liable for a penalty of up to $600,000.

Businesses also need to weigh up the resulting reputation damage amongst its customers and stakeholders that could result from a Commerce Commission investigation or proceedings. As such, in reviewing these contracts, businesses will likely need to make judgement calls on whether to retain terms that could be deemed UCTs, even if these terms offer commercial benefits.

When assessing and making changes to your B2B Contracts, there are some practical tips to consider which will help streamline the process and ensure the adjustments are effective:

  • Terms should always be assessed against the UCT requirements.  
  • Terms should be written in “plain English” and presented clearly to all parties.
  • Ensure that terms apply equally to the parties, where possible.
  • If a term is required but there is a significant risk that it may be considered unfair, the term should be drafted separately from the other terms of the contract.

Making the necessary changes may seem time consuming, and for some businesses overwhelming. However, it is essential and will ultimately benefit businesses and how they operate.

Haigh Lyon can provide advice on reviewing business contracts, terms of trade, and business practices to ensure compliance with the new requirements by the August 16, 2022 deadline. Contact Raj Gurusinghe on or 09 306 0629. 

To mandate or not to mandate vaccinations

Three key issues when considering Covid-19 workplace vaccine mandates

With the Government’s push for all eligible New Zealanders to be vaccinated against Covid-19, employers are understandably grappling with the question of what responsibility they have to encourage or require Covid-19 vaccination in their employees.

There has been considerable legal and media attention on whether employers can mandate Covid-19 vaccinations for existing staff or have vaccination (or vaccine willingness) as a prerequisite for new employees.

The Government has issued an order that legally obliges certain workers to be vaccinated. Although the lawfulness of that order has been challenged, so far, the courts have confirmed its legality. There can be little doubt that, as matters stand, if an employee is in a role covered by the order then they must be vaccinated in order to do their job.

What is currently more tricky for employers to deal with is what this means for employees not covered by the order.     

There are three key issues not being widely discussed which are important in determining the appropriateness of employer-imposed vaccine mandates:

  • The central importance of the efficacy of Covid-19 vaccines in preventing transmission of the virus
  • The relevance of the Government’s vaccine order to an employer’s Covid-19 risk assessment
  • The potential scope of a discrimination claim on the basis of vaccine status

Each of these are addressed below.

Prevention of transmission

Employers must keep in mind what the purpose of the vaccine is in terms of preventing the risk of Covid-19 in the workplace. This boils down to the prevention of transmission of Covid-19. The other known benefit of the vaccine is the reduction in the seriousness of symptoms for the individual who contracts the virus. However, it is the ability of the vaccine to reduce the transmission of the virus between workers that should be an employer’s primary focus when considering a vaccine mandate.

In short, if the vaccine does not materially reduce the transmissibility of Covid-19 in the vaccinated, then it will be difficult to justify a mandate as a health and safety measure.

Given its significance to any potential vaccine mandate, this point will need to be an essential consideration of any risk assessment an employer undertakes. Accordingly, the author of any such risk assessment report will need the relevant scientific expertise to provide an employer with an up-to-date assessment of the effectiveness of the vaccine in reducing transmission.

In the recent High Court judgment of GF v Minister of Covid-19 Response the Government position was that there is growing scientific evidence and consensus that the vaccine is effective in reducing the rate of transmission of Covid-19. This was the position that was essentially adopted by the Court. However, this evidence appears to have been uncontested by the applicant, so caution is warranted before relying on this judgment to support the position that the vaccine substantially reduces transmission of the virus.

By contrast, for example, the Centre of Disease Control in the United States has recently published two studies showing significant outbreaks of the Delta variant in highly vaccinated populations[1], indicating that the vaccines do not significantly reduce transmission of the virus.

The other point to make in this respect is that if it is correct that the vaccine substantially reduces (or even eliminates) transmission, then this is potentially reason in itself not to mandate the vaccine – particularly if an employer’s workforce is largely vaccinated. In other words, if the vaccine prevents transmission then the vaccinated are effectively protected against any unvaccinated co-workers. That is to say, an unvaccinated employee does not present a material risk of infection to the vaccinated.

While we are not experts on whether the vaccine sufficiently reduces transmission of Covid-19, the important takeaway is that this issue must be a key focus for any consideration of an employer-imposed vaccine mandate. An employer must make an assessment of the risks based on credible and reliable information. 

Relevance of Government’s mandate and Covid-19 to employer risk assessments

The Government’s vaccine mandate is an unprecedented step in constraining the scope of the otherwise private employment relationship. Clearly this order is of significant importance to employers who employ workers in roles that are captured by the order. However, the order is also key for employers unaffected directly by the order, but who are considering imposing a vaccine mandate.

The reason the order has a broader significance is because it effectively represents the Government’s considered view as to where the line is to be drawn in terms of those jobs which represent a significant risk of transmission of Covid-19. This fact is stated explicitly in the purpose of the vaccination order which reads: ‘the purpose of this order is to prevent, and limit the risk of, the outbreak or spread of COVID-19 by requiring certain work to be carried out by affected persons who are vaccinated.’

Put simply, an employee faced with a vaccine mandate by their employer might quite justifiably turn around and say: “If my job really does carry a significant risk of transmission of Covid-19, then wouldn’t the Government have included it within the order?” This is not to say an employer is precluded from introducing a mandate outside of the order. However, while New Zealand’s borders remain more or less closed, and the order is in place, any employer proposing the imposition of a mandate should be prepared to justify why a job not covered by the order (and therefore outside of the Government’s defined areas of particular risk) requires a vaccinated worker to fill it.  

Vaccine mandate and the scope of discrimination

The most significant risk an employer faces in requiring vaccination (or vaccine willingness) for new employees, is that in doing so they may be unlawfully discriminating against potential employees who are not or unwilling to be vaccinated.

Determining whether or not unlawful discrimination has occurred is a two-step process. First the discrimination must be identified. Discrimination occurs where there is different treatment on a prohibited ground between persons or groups in comparable circumstances. This different treatment must also lead to material disadvantage (exclusion from consideration for employment would be considered a material disadvantage). The second step is establishing that the discrimination in question was not justified in the circumstances.

The Human Rights Act sets out a number of prohibited grounds of discrimination. The list is exhaustive, so any treatment questioned, needs to come within one of the defined categories. Of potential relevance to requiring new employees to be vaccinated are the prohibited discrimination grounds of pregnancy, disability (which covers existing physical or mental conditions, illnesses or impairments and the presence of certain organisms capable of causing illness) and religious beliefs.

Much of the discussion we have seen concerning the risk of unlawful discrimination has focussed on the possibility that, for example, a prospective employee may not be vaccinated for a particular medical reason, such as a previous adverse reaction. However, there has been comparatively little discussion of whether treating prospective employees differently based on their vaccine status might also fall within a prohibited ground of discrimination.

While the definition of ‘disability’ in the Human Rights Act is wide, vaccination status does not obviously fit within one of the definitions of disability. However, a court adopting a purposive approach to interpretation could accord a generous scope to the definition of disability. It must be remembered that the Human Rights Act was designed, at least in part, to give effect to New Zealand’s international obligations, for example as a signatory to the International Covenant on Civil & Political Rights (ICCPR). It is from the ICCPR that that right to be free from discrimination derives, and the right as it is set out in the Covenant protects against discrimination on the basis of any status. In short, if challenged, it is open to the Human Rights Review Tribunal, or other court, to conclude that discrimination because of vaccination status alone amounts to differential treatment on the basis of a prohibited ground of discrimination.

In conclusion, for discrimination to be unlawful, the differential treatment must also be an unjustified limitation on the right to be free from discrimination. Consideration of this issue is likely to circle back on the two matters we have discussed above – the efficacy of the vaccine in preventing transmission of the virus, and the fact the Government’s vaccine order would appear at present to have demarcated the line of acceptable risk in terms of the spread of Covid-19 amongst workers.

Covid has thrown up many complicated issues and when it comes to vaccinations in the workplace, it is by no means a straightforward legal or factual analysis. We recommend employers seek tailored legal advice before considering a vaccine mandate.

Haigh Lyon can advise employers about their rights, responsibilities, and issues when considering mandating vaccinations for employees.
Contact Ben Molloy on 09 306 0605 or

[1] https://www.cdc.gov/mmwr/volumes/70/wr/mm7038e3.htm; https://www.cdc.gov/mmwr/volumes/70/wr/mm7031e2.htm

I’m separating – do I really need a lawyer?

When a couple (married, civil union or de facto) separate there is a lot to organise. Often, the last thing people want to do is to see a lawyer to divide their relationship property but reaching an informal agreement between you may mean you miss out on understanding all of your entitlements, or understand your obligations.

The Property (Relationships) Act 1976 encourages parties to reach agreements without having to go to court. A one off meeting can set you up to reach your own agreement without the full service assistance of a lawyer.

However, if you want your agreement to be in writing (and often the bank will require this in order to refinance one party to pay out the other) there are very strict rules in regards to requirements that must be complied with for an agreement to be binding. For an agreement to be binding, it must be in writing and both parties must have had independent legal advice from their own lawyer before signing the agreement. The lawyers witnessing the agreement must provide a certificate that they have explained the effect and implications of the agreement to their client. If these formal requirements are not met, either party could seek to set the agreement aside in the future.

The starting presumption is that property will be shared equally where there is a qualifying relationship. There are exceptions such as for example where there are short relationships (under 3 years) or where an inheritance has been received by one party or the parties have children.

If there are trusts involved, the matter is less straightforward as trust property is not relationship property. If there is a trust involved we recommend you see us for advice as the circumstances vary from couple to couple.

Haigh Lyon are able to help you through all stages of the separation process and are available to assist you to reach a fair and enforceable agreement with your former partner.

Understanding the Government’s recent housing announcement

The government has unveiled its highly anticipated plan to ‘turn down the heat’, in the property market and slow the ever rising house prices.

This article proposes to provide you with an overview of this plan. While these proposed changes remain subject to consultation and amendment prior to being introduced into legislation, given the current political landscape, it is likely that this plan will be put into place as announced.

Irrespective of the above, some key dates announced as part of the plan occur as early as this Saturday, and so we feel that it is important to provide you with an overview of the changes as they stand as they may affect a range of decisions, particularly with respect to property investment in the coming months.

Tax Implications for Investors

Perhaps the biggest blow to investors to come from Tuesday’s announcement is the removal of interest deductibility for residential investments for properties purchased after 27 March 2021. This change will take effect from 1 October 2021 and means that the majority of investors settling property purchases after this Saturday will no longer be able to offset their interest costs against rental income for tax purposes.

Of significance is the suggestion that new builds will be excluded from this rule, and as such, investors will still retain the ability to offset interest costs in this way, on the basis that the property purchased is a new build.

For those who already have investment properties, this change will not take effect immediately. It will be phased in over the next fice years with the intention that from 1 April 2025 no investors will be able to offset interest costs, save for those properties captured by the suggested new build exemption.

The objective here is to ‘level the playing field’ for first home buyers who are currently competing with investors to purchase existing residential property.

When a Property is Acquired

Given the impending changes, the date on which you may consider a property as ‘acquired’ will play a key role in whether a purchaser will be caught by this new regime.

For tax purposes, a property is generally considered as ‘acquired’ on the date a binding sale and purchase agreement is entered into.

This means that if you entered into an unconditional agreement for sale and purchase prior to the announcement on 23 March 2021, then you can treat the property as being acquired prior to 27 March 2021 and accordingly still fall within the old regime.

First Home Buyers

The plan as outlined by the Prime Minister, Jacinda Ardern, and the Finance Minister, Grant Robertson, also makes a number of changes to existing regimes, some of which target those who are purchasing their first home. Briefly, these include:

  1. First Home Grants, will be available to a larger range of New Zealanders. This has been achieved by:
    • raising the caps of house prices captured by the system;
    • raising the maximum household income for applicants; and
    • lowering the deposit required to only 5%.
  1. A fund of $3.8 billion has also been put into a ‘Housing Acceleration Fund’ aimed at accelerating housing supply in both the short and medium term and also footing the bill for infrastructure to support housing development. No further information has been provided as of yet with respect to timelines or targets.

Bright-Line Test – From Five years, to Ten Years

In addition to the changes contemplated above, the government also announced an amendment to the timeframe for the bright-line test. This amendment will affect the way tax is charged on capital gains earned from investment properties.

The bright-line test, as it currently stands, applies to the sale of residential land which was acquired after 1 October 2015. This test provides that if residential land has been acquired after that date and then on-sold within five years, any capital gains made on that sale will be taxable. The main exclusions to this rule are where the property concerned is a main home, inherited land, or transferred due to a relationship property agreement.

As a result of the announcement on Tuesday, the government is intending to double this length of time from five years to 10 years from 27 March 2021. Investors will accordingly need to retain their investment properties, purchased after 27 March 2021, for a period of 10 years in order to avoid the conditions of the bright-line test. Interestingly, however, the test will remain at the original five years for new builds purchased after 27 March 2021.

The current exclusions to this regime being main homes, inherited land or transfers as a result of relationship property agreements will likely remain in place, however it’s important to note that the ‘main home exclusion’, may only be used twice in any two year period.

Change of Use of Residential Property

In addition to the above changes around the bright-line test, the government also intends to introduce rules around the change of use of a main home.

Any residential property used as the owner’s main home for their entire ownership will remain exempt from the bright-line test.

For newly acquired residential properties, including new builds, the government will introduce a ‘change of use’ rule. This rule proposes to change the way tax is calculated if the property was not used as the owner’s main home for more than 12 months at a time during the applicable bright-line period.

If a property owner switches their property from their main home for a short period, being less than 12 months, then they do not need to count that as a change of use and this period will be considered as the property remaining the main home.

If the property owner switches the property from their main home for a period longer than 12 months, they will be required to pay income tax on a proportion of any capital gains based on the length of time the property was not used a main home. The intention is that this new rule will make the tax calculation fairer when it comes to changes of use, and gets rid of the current ‘all or nothing’ regime.

If you have concerns with respect to any of the proposed changes, or if you would like to discuss your needs in light of them please do not hesitate to get in touch with one of the team at Haigh Lyon.

Farewell to Gerard Molloy

It is with the heaviest of hearts but with the warmest of well wishes that we announce the retirement of Gerard Molloy from the Haigh Lyon partnership.

Gerard assures us he will not be retiring from professional life (just yet) and in typical Gerard fashion is enthusiastically looking forward to his next adventure.

During his time with Haigh Lyon, Gerard has devoted his unbridled enthusiasm to pursuing his clients’ interests, achieving many notable outcomes and helping people navigate some of their most difficult times. Gerard does this with a keen sense of self and authenticity. He will be missed for his vibrancy, sharp intellect and ability to connect with young and old.

The 2021 commercial world is very different to the environment of the last 20 years. Through all the changes, over all the years, the firm has focused on employing the right people who are approachable and understand that great client service and meaningful relationships go hand and hand. Gerard has been an important part in creating the vibrant and cohesive culture that we enjoy today and that has enabled the firm to thrive for generations.

The partners and staff at Haigh Lyon would like to acknowledge Gerard’s significant contribution to the firm and its growth over the years. We will miss the energy, humor and compassion that Gerard has shared with us. From us and from you, our clients, we wish him all the very best.

As a trustee, will my legal fees be covered by the Trust?

As the Trustee of a Trust, there may be times when you face litigation from the beneficiaries, or your co-trustees.

Litigation is often a pricey exercise, even if you are the successful party, so naturally as a trustee you may be thinking, “I’m only facing this litigation because of my position as a Trustee, surely the Trust will therefore fund my legal fees?”.

As a starting point, section 81 of the new Trusts Act 2019 provides that a Trustee may be indemnified out of the Trust property for any expense incurred when acting reasonably on behalf of the Trust. Additionally, the Act states that the operation of that indemnity is to be governed by the rules of common law and equity as they relate to Trusts.

However, the common law (law made by the Courts) muddies the position significantly, and Trustees should not assume that they will receive an indemnity out of the Trust for all litigation. Trustees seeking an indemnity out of the Trust assets for legal fees will need to make a so-called Beddoe Application. A Beddoe Application is an application to the Court by Trustees seeking directions for how to act. In this case, the Beddoe Application would be dealing with whether the Trustees could correctly use the Trust assets to indemnify themselves for legal fees prior to the proceedings.

These principles will also apply to executors of an estate, who are effectively Trustees of that estate.

Trustees can traditionally be indemnified from the Trust fund if they can meet three requirements:

  • Show that the cost arose from an act within the scope of the Trustee’s duties;
  • Was incurred in carrying out an obligation of the Trustee; and
  • If in the circumstances the expense was reasonable.

Further, the Court of Appeal in Pratley v Courteney considered that litigation against Trustees generally falls into one of three categories:

  1. Proceedings brought to seek the guidance of the Court on aspects of Trust administration or construction. For example, proceedings in relation to a dispute between Trustees as to how Trust property should be invested;
  2. Proceedings brought by third parties against the Trust. For example, proceedings brought by a creditor of the Trust to enforce payment;
  3. Proceedings brought by beneficiaries disputing the correctness of actions taken or not taken by Trustees. For example, proceeding brought by beneficiaries alleging that a Trustee took Trust property for their own benefit (this is often called “Hostile Litigation”).

Courts have considered as a general rule that Trustees can make (and will often be granted) a Beddoe Application to seek the directions of the Court to use the Trust funds to defend a claim made under the first two categories. In the case of the third category, Hostile Litigation, where the Trustees are effectively defending the correctness of their own actions, Courts have considered it is not appropriate for the Trustees to have their legal fees indemnified by the Trust until the Court establishes the correctness of the Trustee’s actions.

If, in the Hostile Litigation, Trustees’ actions are upheld by the Court, generally speaking the High Court Rules provide that the unsuccessful parties should pay the winning parties’ costs; any shortfall will likely be made up from the Trust assets. On the other hand, if the Trustee’s actions are not upheld, the Trustees will not be entitled to an indemnity from the Trust assets, and will be personally liable.

However, this analysis can only occur after the fact; until the conclusion of proceedings a Trustee defending the correctness of their conduct will have to wear the cost of their legal fees.

In the case of Pratley an executor was defending proceedings from a creditor of the estate (the son of the testator, who was also a beneficiary of the estate) who had funded the palliative care of the deceased during his final days. The Court considered that this claim fell into the second category, as although the individual bringing proceedings against the executor was a beneficiary, the claim was brought in the context of a creditor-debtor relationship.

A more recent High Court decision, Mclaughlin v Mclaughlin, involved the Trustees defending proceedings brought on a variety of grounds, including; for the removal and replacement of Trustees on the basis of mismanagement and breach of fiduciary duties, seeking direction from the Court as to the investment and distribution of Trust property, and alleging breach of Trust and fiduciary duty by the Trustees.

The Trustees made a Beddoe Application seeking their legal fees to be indemnified out of the Trust assets for all the proceedings. The Court held that the only claim for which the Trustees were entitled to be indemnified from the Trust assets in respect of legal fees incurred were the proceedings seeking directions as to the investment of Trust property.

The Court justified this on the basis that Beddoe Applications should only be granted where granting that application was in the best interests of the Trust. The Court considered that indemnifying the legal fees of the Trustees where breach of trust was the issue was unlikely to be in the best interests of the Trust until the Trustees actions’ were upheld (i.e. the allegations of a breach of trust were found to be unsubstantiated).

Mclaughlin has since been followed in another High Court decision, In Re McCallum. In McCallum, the executors of an estate were defending a variety of claims including breach of trust, knowing receipt of estate assets, and an application to remove the executors. The Court further considered that factors contributing to whether the Beddoe Application was in the best interests of the estate included:

  • The nature of the claim;
  • The nature of the Trust; and
  • The substantive merits of the claim.

The Court granted the Beddoe Application fully only in respect of the proceedings relating to breach of moral duty (a claim against the estate that the applicant had not been adequately provided for in the will), and in respect of the application to have the executors removed (but only because the application laid down no clear legal or factual basis justifying the removal of the executors).

Before taking on the responsibility of becoming a Trustee, or before making decisions in your capacity as a Trustee, it is important to understand the full implications of these decisions. As discussed above, a Trustee who needs to defend themselves from litigation because of their role as Trustee will not necessarily be able to rely on the Trust assets to provide an indemnity for their legal fees.

Haigh Lyon can provide further information and advice to assist you in making decisions that will reduce the risk of facing so-called Hostile Litigation, and the risk of being saddled with legal fees as a result of this.

Company law changes during Covid-19

As the impact of the COVID-19 outbreak continues to play out, companies and their directors are faced with difficult choices about how to respond in an uncertain trading environment.

The Minister of Finance has announced certain temporary changes to the Companies Act 1993 (the Act) to assist companies that are facing insolvency due to COVID-19.

Some key takeaways of the proposed changes are that:

  • Some directors duties under the Act will cease to apply if a company trades while insolvent for the next 6 months provided that certain criteria are met including that the company can pay its debts within the next 18 months.
  • If half of a company’s creditors agree to an across the board payment proposal, a six month moratorium can be placed on the enforcement of payment of debt by any of the company’s creditors.

Safe harbour
The current position under the Act is that directors can be personally liable if they:

  • agree to, cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors (Section 135 (Reckless trading)); or  
  • agree to the company incurring an obligation unless they believe at the time on reasonable grounds that the company will be able to perform the obligation when it is required to do so (Section 136 (Duty in relation to obligations)).

These provisions are designed to ensure that directors take steps to reduce the potential losses to creditors once they become aware that there is no longer a reasonable prospect of the company avoiding insolvency. In the uncertain trading environment resulting from COVID-19, these provisions would place a number of directors under pressure to liquidate businesses that were otherwise operating smoothly.

Directors’ decisions to continue trading, as well as decisions to take on new obligations over the next six months will not result in a breach of the duties in section 135 and 136 of the Act, if:

  • in the good faith opinion of the directors, the company faces or is likely to face significant liquidity problems in the next six months as a result of COVID-19 on them or their creditors;
  • the company was able to pay its debts as they fell due on 31 December 2019; and
  • the directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within 18 months (for example, because trading conditions are likely to improve).

The proposed changes aim to give directors facing significant liquidity problems due to COVID-19, a “safe harbour” from the insolvency duties under sections 135 and section 136 of the Act.

The Minister of Finance has emphasised that the “other protections in the Companies Act, such as those addressing serious breaches of the duty to act in good faith and punishing those who dishonestly incur debts, will remain in place”.  The suspension of the duties contained in section 135 and 136 should not be viewed as a  “get out of jail free” card for any and all actions taken to keep companies operating during the COVID-19 outbreak.

The safe harbour is subject to agreement by Parliament. The Government will ask Parliament that the proposed changes are backdated to 4 April 2020.

Business debt hibernation regime
The Government also proposes to introduce a COVID-19 business debt hibernation regime (BDH regime) to the Act which would allow a company to place a moratorium on debt payments.

The stated intention of the BDH regime is to:

  • encourage directors to engage with creditors to arrive at simple arrangements for the management of debt;
  • allow the directors to stay in control of their companies;
  • provide certainty to creditors that payments will not be clawed back; and
  • be simple and flexible so that it can be easily applied to individual circumstances.

The key features of the BDH regime as outlined to date are set out below:

  • Directors will be required to meet a threshold test before gaining access to the BDH regime. The details of the threshold test have not yet been provided.
  • If the threshold test is met, the directors must notify the creditors of the proposal to place a moratorium on debt payments.
  • The creditors will have 1 month from the date they are notified of the proposal (Notification Date) to vote on the proposal. The proposal will proceed if 50% or more of the creditors (by number and value) agree to it.
  • A 1 month moratorium on the enforcement of debt will come into effect from the Notification Date and a further 6 month moratorium will apply if the proposal is agreed to by the creditors.
  • If the proposal is rejected by the creditors, the directors will still have the range of existing options available to manage debt including continuing to trade or entering into voluntary administration.
  • If the proposal is passed, the BDH regime will bind all creditors of the business, other than its employees.
  • Crucially, during the moratorium the company is allowed to continue to trade, subject to any restrictions agreed with creditors.
  • Any further payments made by the company to creditors will be exempt from the voidable transaction regime. This means that creditors who continue to trade with the company after the entry into the BDH regime will be protected from payments being clawed back if the company is at a later date placed into liquidation (unless those transactions occurred in bad faith).
  • The BDH regime will be available to all forms of entities with legal personality as well as other entities such as trusts and partnerships, but will not be available to licensed insurers, registered banks and non-bank deposit takers and sole-traders.

For more information on the safe harbour and the BDH regime and how these changes may apply to your particular circumstances, please feel free to contact our Commercial Team.

Shared care arrangements

The current circumstances are both unprecedented and difficult. This time of uncertainty is made more challenging by the need to juggle shared care arrangements of children.

The following is intended to be information that parents and caregivers may wish to consider in light of the fact that New Zealand is currently at COVID-19 Alert Level 4.

Best interests of the child
In respect of care of children during this time, the overriding consideration as always is for parents and caregivers to make decisions that are in the best interests of their children. However, it is now important to do this while remembering that the purpose of Alert Level 4 is to prevent the spread of COVID-19.

During this time, it is important to remain, as much as possible, in your self-isolating unit or “bubble”.

In cases where there is a shared care arrangement in place, parents and caregivers will need to consider whether the shared care regime should continue or whether a child should remain in place for the initial four-week lockdown period.

Parents and caregivers should discuss if shared care arrangements would allow COVID-19 to potentially spread without them being aware and reach an agreement between themselves. This may mean the child needs to stay with one parent/caregiver for the initial four-week period.

Maintaining shared care arrangements
The guidance from the Principal Family Court Judge is that children in shared care arrangements in the same community can continue to go between households unless:

  • The child is unwell;
  • Someone in either home is unwell;
  • Someone in either home has been overseas in the last 14 days or has been in close contact with someone who has the virus or is being tested for the virus.

There is currently no definition of “in the same community”. Where the shared care arrangements involve caregivers in different towns, the guidance is that the safety of the children and others in their units should not be compromised by movement between those homes.

Parents and caregivers will need to use their judgement, taking a socially responsible and common sense approach, as to whether the households in a shared care arrangement are in the same community. It is possible that the government may put measures in place to restrict the movement of people other than those considered essential services for the purpose of carrying out those services. Parents and caregivers should consider that travel may be restricted before arriving at their own arrangements in relation to shared care arrangements, particularly if these involve travelling considerable distances to transport children between households.

Factors to consider
It may be possible to maintain the integrity of your bubble across two households for the purposes of maintaining a shared care arrangement. However, it remains important that the integrity of your bubble is not compromised further. The following are matters to consider when thinking about the integrity of your bubble:

  • Are there only two households involved or are there people coming and going from more than two households (for example where there are children from two shared care families being cared for in one household)? The advice from the Principal Family Court Judge is that the safety of all concerned should not be compromised if there are more than two households involved.
  • Are any of the people in either household vulnerable? If so, extra care may be warranted. If your care arrangements involve households where grandparents are also living, for example, consideration may need to be given as to whether people in either household should be going to the supermarket to shop. If online shopping is not possible for both households, alternative care arrangements may need to be considered.
  • Are any of the people in either household essential workers? Essential workers are at higher risk of contracting COVID-19. Shared care arrangements where one of the caregivers is an essential worker (or has close contact with an essential worker) compromise the integrity of the bubble for all households involved in the shared care arrangement. Care arrangements may be need to adapted in the short term to ensure that the integrity of a household’s bubble can be maintained.

Consolidation of care arrangements
Parents and caregivers may also need to consider short term variations to care arrangements to limit the number of times children travel between homes. Parents and caregivers may wish to consider consolidating their care arrangements over this time into larger blocks of time for each caregiver. For example, it may be more appropriate for a child to spend the first two weeks of lockdown with one caregiver and the second two weeks with the other caregiver. This 14-day period would have the advantage of aligning with the recent self-quarantine guidelines for people returning from overseas and may provide some assurance that no one in either household has developed symptoms over that 14-day period. Other consolidation arrangements may also be appropriate.

Movement between households
Where caregivers decide that moving between households is appropriate, children should be accompanied by an adult when moving between homes. Private vehicles should be used to transfer children between households wherever possible.

We would also suggest that where parents are travelling between shared care homes, they have copy of the parenting order or agreement (if one exists) with them (either in hard copy or electronically on a device) in case they are stopped by police.

Indirect contact where children cannot go between households
The Principal Family Court Judge has indicated that where children cannot move between households, she would expect indirect contact – such as by phone or social media – to be generous. The same expectation would apply in cases where care arrangements have been consolidated over the four-week lockdown period.

Priority proceedings and enforcement of existing arrangements
The Family Court is an essential service and will continue to operate through all pandemic alert levels but on a reduced capacity, dealing with priority proceedings.

Priority proceedings in the Family Court relevant to children, include:

  • Urgent matters of safety, such as to protect a person from family violence or to protect a child from unsafe parenting; or
  • Urgent care and protection concerns that require Government intervention for a child via Oranga Tamariki.

Please talk to a member of the Haigh Lyon family team in the first instance if:

  • You are unsure as to whether you have an issue considered a priority proceeding; or
  • Any urgent issues arises for you during this period that may necessitate a priority proceeding.

Caregivers should be aware that the courts will have extremely limited capacity to address enforcement measures in relation to existing care arrangements or parenting orders during the lockdown period (outside of the priority proceeding referred to above). Parents and caregivers are strongly encouraged to reach their own agreements in respect of care of children during this time. However, if they are not able to do so the court will not intervene to uphold existing agreements for the time being unless the criteria for a priority proceeding is met.

Caregivers should nevertheless be aware that the court has indicated that the pandemic should not be seen as an opportunity for parents and caregivers to unilaterally change established care arrangements without cause or otherwise behave in a manner inconsistent with the child’s best interests or the court ordered care arrangements.

Further information and assistance
Caregivers must put aside their conflict at this time and make decisions that are in the best interests of the child and their families and the wider community. We appreciate this may be difficult for caregivers who have been in conflict over care arrangement.

Further information and updates families are referred to the Unite against COVID-19 website (https://covid19.govt.nz/).

Should you require additional advice in respect of managing your share care arrangement during this time, a member of Haigh Lyon’s family team can assist. The Haigh Lyon family team remain available throughout this period working remotely, should you wish to discuss anything via email, phone or online video conferencing.

Mitigating the impact of COVID-19 on commercial contracts

The ongoing Coronavirus (COVID-19) pandemic, and the measures implemented by governments worldwide to contain it are having an unprecedented impact on global financial markets, trade, and commerce.

As businesses deal with the growing impact of COVID-19, a key aspect of a broader risk management strategy, is to review key contracts to understand the risks (and opportunities) that may be presented if contractual obligations are severely affected.  Fortunately, there are various protections available for businesses that are concerned about their ability to meet their contractual commitments.

Does your contract provide force majeure protection?

Force majeure clauses are typically included in contracts in case certain events occur, beyond a party’s control, which prevent it from performing its contractual obligations.  If a force majeure clause is triggered, then the impacted party will have the ability to suspend the performance of its obligations and, in some cases, terminate the contract altogether.

Force majeure clauses typically require a party to establish that:

  • a force majeure event has occurred;
  • the force majeure event was beyond the party’s control;
  • the force majeure event either delayed or prevented the party from satisfying its contractual obligations; and
  • there were no reasonable steps that could have been taken to mitigate the impact of the force majeure event.

Whether a party will be able to rely on the effects of COVID-19 to exercise its rights under a force majeure clause will depend on the nature of the contract, the wording of the force majeure clause, and the impact COVID-19 has had on the parties’ positions.  In our experience, outbreaks such as COVID-19 are typically captured by force majeure provisions.

Caution should be exercised before a contract is terminated in reliance on a force majeure clause.  If a party incorrectly asserts that a force majeure event has happened in circumstances where it is not contemplated by the contract, then the other party can seek damages on the basis that the contract has been repudiated.

Can your contract be terminated on the grounds of frustration?

If a contract does not contain a force majeure clause that is triggered by COVID-19, then the contract may be frustrated by operation of law.

Frustration contemplates that, where a contract has become impossible to perform or radically different than what the parties initially agreed, due to the occurrence an unforeseeable event, then the impacted party is excused from its failure to perform its obligations and the contract is treated as being automatically terminated.

Frustration can apply in circumstances where:

  • a change of law or government directive renders performance illegal; or
  • the purpose of the contract is not able to be fulfilled (for instance, where the contract relates to an event that is no longer going ahead).​

As with force majeure clauses, businesses should be careful before terminating contracts on the grounds of frustration.  If it does not apply, then the claimant may have wrongfully repudiated the contract and exposed itself to a damages claim from the other party.

What other clauses may apply?

It will be important for businesses to review all relevant clauses against the impacts of COVID-19 on their business.  These include:

  • termination provisions;
  • material adverse change provisions; and
  • change in law provisions.

These provisions may provide a party grounds for suspending the performance of their obligations or terminating the agreement.

What steps can businesses take to mitigate risk?

In light of the current uncertainty associated with COVID-19, there are a range of measures that we encourage businesses to take to limit their exposure:

  • Undertake a review of all key contracts to determine whether they contain a force majeure clause and, if so, the conditions for triggering it.
  • Engage, as early as possible, with customers and suppliers to consider alternatives to avoid or minimise the impacts of COVID-19 (particularly as force majeure clauses often include a duty to mitigate the impact of the force majeure event).
  • Make enquiries with your insurance broker as to whether insurance cover is available under a business interruption policy.
  • When negotiating new contracts, carefully consider the potential impacts of COVID-19 (and similar outbreaks) and clearly outline what the parties intend to occur if the contract is affected.

Get in touch

Please feel free to get in touch with us if you would like assistance in assessing how your contractual obligations might be affected by COVID-19 and your available options.