Category Archives: Uncategorized

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.

Defending your dog

Unfortunately, New Zealand dog owners are regularly before the courts for the alleged misconduct of their dogs. In 2018 alone, local councils commenced 467 prosecutions in courts across the country under the Dog Control Act 1996, 82 of which resulted in the destruction of the dog.

As an owner (or a person in control/possession of a dog), you can be criminally liable for the actions of your dog. If your dog attacks a person or animal, you can be convicted and sentenced to a fine of up to $3,000 (for the most common offences). If the attack causes injury, there is the possibility of a fine, community work or even a term of imprisonment.

If your dog is involved in an attack, it is likely that a complaint will be made to your local council. The council’s dog control officers will investigate and determine whether there is evidence supporting the complaint and may decide to file charges against the owner.

The council does have discretion in terms of whether or not to file a criminal charge. By engaging constructively with council from the start, you may be able to negotiate an alternative solution for you and your dog. We recommend engaging a lawyer from the outset to provide you with the best prospects of avoiding prosecution. That said, a reasonable rule of thumb is that a prosecution will occur if the dog attack resulted in an injury to person or animal.

Owners are understandably eager to ensure that their dog is returned if the council has impounded their dog following an alleged attack. Before the council can consider returning a dog to its owner, they must decide whether your dog poses a threat to the safety of people or animals if it were released. If the answer is no, you will be given written notice and have seven days to pay the pound fees and claim your dog.

If the council has concerns about the risks your dog may pose, your dog is likely to remain impounded until the case has been heard. As an owner, you can challenge this decision and try to secure your dog’s release by showing that the council does not have reasonable grounds for its position. Legal representation can be of considerable assistance when you are trying to achieve “doggie bail”.

If the council decides to prosecute you as owner, you can plead either guilty or not guilty to the charges. If you plead not guilty, the matter will proceed to a trial before a judge at your local District Court. This is not a quick process, and from the time charges are filed against you, it can take more than a year for a prosecution to reach a trial date.

If you plead guilty to a dog attack charge (or are found guilty following a trial) then the court will sentence you for the offence. While the most likely outcome for an owner is a fine, the court must also order the destruction of the dog, unless it is satisfied that the circumstances of the offence were exceptional.

The exceptional circumstances test has a high threshold. The Court first considers whether the circumstances of the attack were unique, special or substantially unusual. If satisfied the exceptional circumstances exist, then the Court will make an assessment as to the future risk of the dog attacking another person or animal. The Court will consider the nature of the attack, whether there was an injury, the history of the dog owner, past behaviour of the dog, and whether any preventative steps were taken to reduce risk and if so, why these steps failed. Generally speaking, if there is a risk of a further attack, any exceptional circumstances will not be enough to prevent a destruction order.

Whether post-attack factors, such as subsequent obedience training, can be taken into account law remains unclear. We note, however, that a Court of Appeal decision on this issue is due in the near future, so watch this space.

If you find yourself at the centre of a dog control matter, we recommend you engage legal representation as soon as possible. Haigh Lyon has substantial experience in dealing with local council prosecutions and understands the importance of bringing your dog home. We are Auckland based but are able to travel across the country to defend your dog.

Farewell to Rob Wills

It is with sadness that we announce Rob Wills will be retiring from the firm early next year.

Rob is much loved by clients and staff alike.   His zest for squeezing the most out of life is infectious.

Rob joined Haigh Lyon as a partner in 1992 having previously been a partner at another firm.  Like Rob, his clients have been loyal, and followed him to the new firm.  He continued to advise on property, trust and commercial matters, and in the intervening 28 years he has never had a quiet patch.

He was even busier outside the office.  While raising and educating four children, Anna, Nicola, Julia and Jonathan, he somehow managed to find time to run, cycle and swim.  And he did this a lot!

Rob is a well-known figure at endurance events.  He completed the Coast to Coast three times, participated in numerous marathons including the New York Marathon – with a number of his family in tow, smashed three Ironman races and rode Alpe D’Heuz. He also represented New Zealand at three World Triathlon Championships, proudly captaining the team in Chicago.

As many of you know, it is not unusual to see Rob running or biking around Auckland on a Sunday, putting most of us, no matter what age, to shame with the energy and discipline he brings to his training.

He also continues to be an active member of Downtown Auckland Rotary, including a term as president.

The secret to fitting all this in?  Sleeping through law society seminars.  (Rob is famous for nodding off as soon as the presenter begins).  And a loving and supportive wife, Joanne; who is just as much a part of the staff as Rob.

The firm owes a lot to Rob, not only for his legal knowledge and fantastic clients, but also his mentoring and guidance. Haigh Lyon has a unique and supportive culture, and many clients will not be aware of the extra lengths Rob goes to;  whether it involves getting dressed up for a function, presentation of monthly staff awards or getting involved in firm activities like the corporate challenge. A few years ago, a staff member was moving to Australia, so we cleared away the desks, divided the staff into two teams and had a game of indoor cricket between Australia and New Zealand. We needed a surprise streaker so we secretly asked Rob.  In typical Rob fashion he quietly snuck out donned his speedos, a cape and a mask and ran out onto the ‘pitch’, to give a farewell hug.

Rob turned 70 this year, and is going to take some time to travel and hang out with his four grandchildren.  But we expect he’ll still be around the office anytime there’s a morning tea; though hopefully not in his speedos!

It might only be a matter of time before your farming operation is feeling the heat of a council prosecution…

If you haven’t been subject to one you are likely to know someone who has and, despite good intentions, it might be only a matter of time before your farming operation is feeling the heat of a council prosecution.

Unfortunately, they are something of an occupational hazard for farmers – particularly when it comes to the discharge of effluent in dairy farming.

Council prosecutions are nothing like a speeding ticket. The fines imposed by the courts can be in the hundreds of thousands of dollars and have the potential to cripple a business. Farmers should, therefore, have at least a basic understanding of the process and consequence of a council prosecution and know where to turn for help if they find themselves in the hot seat.

Council enforcement action begins with an investigation. That is the information-gathering stage where council officers try to confirm the nature and extent of suspected wrongdoing. Offending on farms often comes to the attention of council officers during routine monitoring of properties. Public complaints are another common way concerns are referred to councils.

Once a council has learned of suspected non-compliance its officers have legal powers to enter private property to collect information and evidence. One important exception, however, is that council officers are not authorised to enter private homes. If council officers want to do that they must apply to a court for an order or search warrant.

If, following an investigation, council officers are confident the evidence they have collected is sufficient to support a prosecution and that such a step is in the public interest, ie, worth ratepayers’ money, then formal charges will be filed in court against the alleged offender.

There are a number of charges available to councils under the Resource Management Act (RMA) and Building Act (BA). Common RMA charges include using land in breach of the district rules, usually doing something without a consent when one was required, and discharging contaminants into or onto water or land. The most common BA charge is doing building work without or not in accordance with a building consent.

For most offences under those acts councils do not need to prove a person or company intended to commit the offence. Usually, it is enough for a council to show that a person or company was responsible for the wrongdoing in terms of having caused or allowed the incident to happen. That does mean the ability to defend a charge is limited. Furthermore, if you or your company employs or contracts others to do work in relation to your property and they fail to comply with the law then you could also be liable for their offending.

There are certainly avenues for defending council prosecutions. Significantly, charges under the RMA and BA must be filed in court within six months of the council learning of the offending or within six months of the date when the council should have become aware of the offending. That could mean, for example, if council officers had been at a property for a building consent inspection and should have observed wrongdoing at the same time then the six month clock would start ticking even if the officers did not actually notice the issue at the time. Charges might also be defended on the basis the action or event triggering the offending was beyond your control and could not have been foreseen, eg, a natural disaster or sabotage.

More often than not council prosecutions are resolved by the person or company charged pleading guilty at an early stage in the proceeding. However, some prosecutions do go all the way to trial.

The usual consequence of pleading guilty or being found guilty of an RMA or BA offence is a fine. The maximum penalty for BA offences, such as building contrary to or without, a building consent is $200,0000 though the penalties actually imposed are generally at or below $20,000.

The most commonly charged RMA offences carry maximum penalties of a $300,000 fine and two years jail for an individual or a $600,000 fine for a company. Fines imposed for RMA offending are often significantly more than for BA offending. For example, fines in excess of $100,000 are not uncommon for offending concerning the discharge of dairy effluent.

Good legal representation at sentencing can be essential for ensuring the fine you are required to pay is reasonable. Individuals or companies pleading or found guilty of BA and RMA offending will also usually receive a conviction on their record. However, it is sometimes possible to apply for a discharge without conviction if it can be shown the consequences of conviction are out of all proportion to the seriousness of the offending. If such an application is successful it usually means you will still pay a fine but will avoid a conviction.

If you or your company are facing a council investigation or a full blown prosecution we recommend seeking urgent legal advice.

 

 

Thinking of buying an investment property?

As part of the government’s efforts to address the concerns around rising house prices, new tax rules on ring-fencing rental losses have been introduced.  The goal of the new rules is to improve housing affordability for owner-occupiers by reducing demand from property speculators and investors.

The new ring-fencing rules came into effect on 1 April 2019 and will impact 2020 income tax returns.

What do the rules mean?
Historically when a rental property made a tax loss for its owner, this loss was available to offset against the owner’s other income – income such as salaries and certain business profits – resulting in less taxable income, and less taxes paid overall.

The new ring-fencing rules mean this loss offset will no longer be available.  Any rental loss will carry forward into future years and will only be available for offset against future residential property related income.

This puts residential property losses into their own category, separate from other sources of income.

Who will be impacted?
The ring-fencing rules only apply to losses made from residential land, however there are a number of exemptions, as follows:

  • Property used mainly for business or farmland
  • Property subject to “mixed-used” asset rules (such as a holiday home that is sometimes used privately and sometimes rented out)
  • Entities that are in land-related businesses such as land development or land trading
  • Certain employee accommodation and properties owned by companies except close companies with less than 5 shareholders holding more than of 50% voting interests

What about the “bright-line test”?
The bright-line test defines profits from the sale of residential properties (main home exempted) bought after 29 March 2018 and sold within 5 years (or within two years if bought between 1 October 2015 and 29 March 2018), as generally taxable.

If you have ring-fenced property losses available at the time the bright-line profits occurred, then the losses can be used to reduce the profits.

Similarly, any loss made on a property sale subject to the bright-line test, will be ring-fenced and carried forward.  It will only to be available for offset against other residential property income.

How are the rules applied?
The default position is that the rules are applied on a ‘portfolio basis’ meaning losses from one property can be used to offset profits of another property, in the same ownership.  The alternative of isolating losses of one property from another is also available but it is unlikely to be recommended due to the additional compliance required, and the generally less favourable outcomes.

What about residential properties owned by trusts and companies?
Residential properties that fall under the ring-fencing rules will be impacted regardless of whether they are owned by trusts or companies.  Exclusions such as the main home exclusion will also still apply.

Look-through company (‘LTC’) structures where income/losses are transferred directly to shareholders are also impacted.  Shareholders can no longer offset LTC residential property losses against their other income.  Instead, the losses hold their form and will be ring-fenced as if they were generated by the shareholder directly.

The ring-fencing rules also cover situations where a company or trust ownership structure is used to circumvent the rules. An example might be the use of a personal loan to buy shares in a company that owns the residential property – separating the ring-fenced income from loan interest expense.  In this case if more than 50% of the company’s assets are residential properties then any income and expenses relating to the property are ring-fenced regardless of whether the expense is in the company’s name, or not.

This rule can extend to properties owned outside of New Zealand as well, meaning losses from overseas rentals might also be ring-fenced.

Conclusion
The ring-fencing rules are another reduction in the tax benefits previously available to property investors, following on from the removal of depreciation claims.  Over time we will see if the rules have a meaningful effect on property prices, or conversely a flow on cost to residential rents.

The information produced above should not be relied upon as tax advice. Tax advice should always be sought from a professional and tailored to your specific circumstances.

If you have any questions or would like to discuss any of the changes please contact The Business Advisory Group on 09 300 6404

Before you sign the lease…

Houston we have a problem! To avoid such words after having signed an agreement to lease it is important that tenants get advice before signing the agreement.  Once an agreement has been signed it is binding and therefore difficult to negotiate any amendments.

Here are some tips that tenants should consider before entering into an agreement to lease:

Rent Reviews
Rent reviews play an important part in any lease. Look to limit exposure to large rent hikes. Reviews are undertaken through a market review or increased in line with CPI. A tenant should look to impose a cap on any increase e.g. no increase in rent should be greater than 2%.
Rent disputes are resolved by valuers and arbitration. To avoid these costs tenants may consider having CPI increases or fixed rent increases. However, the risk is that these increases will leap ahead of the market. It is often advisable to have a mixture of CPI reviews and market reviews.

Outgoings
Another large expense is outgoings. Outgoings are expenses that are incurred through the running of the premises and include such things as insurance, rates, utilities and service or maintenance contracts. The landlord will usually pay these costs and seek reimbursement from the tenant. Outgoings are often payable in addition to rent.
Tenants should review the list of outgoings carefully and undertake an inspection of the premises and the building services to ascertain whether they are in good repair. If anything needs fixing, the costs will often be passed on to the tenant as part of the outgoings.

Reinstatement Obligations
Tenants who are excited about taking on new premises often forget about their obligations when the lease ends. This oversight can be costly.
Leases often require a tenant to reinstate the premises to its original condition, which can be expensive. This can be resolved by the insertion of a clause in the agreement outlining that the landlord agrees that the tenant shall not be required to reinstate the premises at the expiry of the lease.

Guarantees
It is common for landlords to require a guarantee of some sort; either a personal guarantee from the directors or a bank guarantee.  Guarantors should be wary that if the lease is assigned their liability will continue until the next rent renewal. Accordingly we often recommend that any guarantee given, whether personal or bank, be limited to a certain period ranging between three and 12 months depending on the lease term.  This is something that needs to be inserted into the agreement to lease and is something that landlords commonly concede.

Lease incentives
Tenants should negotiate some form of incentive into a new lease but it can be tricky to know what is acceptable. It is important to remember the agent is working for the landlord and is therefore unlikely to advise a tenant as to how much they should be seeking or what form it should take. Examples of incentives are a rent free period or fit out contribution. Experienced property lawyers will know what is acceptable in the market and will be able to provide guidance.
Tenants should obtain tax advice as some incentives will be regarded as income and therefore might not be as valuable as they first seem.

These are just a few examples of where an experienced property lawyer can save a tenant money, and future headaches.

 

Seed Funding Options for Start-Ups

In the early stages of a start-up, founders typically seek to bootstrap (i.e. self-fund) their operations in order to preserve value through their hard work and expertise. At some stage, most start-ups will need a cash infusion to grow their business and take it to profitability. That’s where investors come in.

Before raising capital, it is important to understand the most common forms of seed investments: equity and convertible debt. Each form of funding has its own pros and cons, and is a better fit for certain situations than others.

Equity
Equity represents an ownership interest in the company.  While equity doesn’t provide as much certainty of repayment as compared to a loan, it gives the investor a greater chance of participating in the upside in a profitable company or a future sale.

The size of an investor’s shareholding in the company will be negotiated based on the amount of the investment and the agreed valuation of the company. It generally involves a compromise between the investor’s eagerness to invest in the company and the founder’s desperation to raise funds.

Equity typically takes the form of ordinary shares or preference shares.

Ordinary shares have various rights attached to them (such as voting and dividend rights), but they usually rank behind other securities in terms of priority.

Preference shares differ from ordinary shares because of the additional rights (preferences) that attach to them. They typically confer on the investor:

  • A liquidation preference, which entitles the investor to recover an additional amount (ahead of all ordinary shareholders) in a liquidation of the company; and
  • An entitlement to receive dividends in priority to the holders of ordinary shares; and
  • An ability to convert the shares into ordinary shares on a future exit.

Preference shares are typically used for more substantial investments as their terms are generally complicated and heavily negotiated.

Convertible Debt
A convertible debt instrument involves the company borrowing money from an investor in the expectation that the debt will convert into equity in the company in the future (such as after a capital raising or a sale event). It is essentially a mix of equity and debt.

Here is a basic example of how convertible notes work:

  • An investor invests $200,000 in a start-up by way of a convertible note.
  • The terms of the convertible note are a 20% discount and automatic conversion after a future capital raising exceeding $1 million.
  • When the next capital raising occurs at a $2 million valuation, the convertible note will automatically convert into equity.

Let’s assume the shares are issued for $1 per share.  As a 20% discount applies, the investor can use their $200,000 investment to purchase shares in the next funding round at the discounted rate of $0.80 per share. This gives the initial investor $250,000 worth of shares for the price of $200,000 (representing a 25% return).

Convertible debt has become a popular form of seed funding for a number of reasons.

  • Valuation: Issuing equity requires you to value your company. This can be a difficult exercise for a company in its early stages. A key advantage of a convertible note is that it doesn’t require the company to be valued until a larger equity round is raised.
  • Cost and speed: Convertible debt is simpler to document than equity financings. This means that they are generally less expensive and that funding rounds can be closed more quickly than equity raisings.
  • Control: Many founders are (naturally) concerned about relinquishing control of their company. Holders of convertible notes typically receive minimal control over the company (for instance, no veto rights or director appointment rights). This is especially helpful for start-ups wishing to undertake a further capital raising without investor interference.

As early stage investment is risky, investors often sweeten their deal by asking for a valuation cap. A valuation cap limits the price at which convertible notes will convert into equity. It is used to protect early investors in case the company’s value skyrockets in the next funding round. For instance, if the valuation cap is $1 million, but the company’s valuation at the next funding round is $1.5 million, then the amount invested will convert into equity at the $1 million valuation cap.

Summing Up
Every situation calls for a different type of investment structure.  It is important to understand the subtleties of the various structures and balance the particular needs of the company against the risks and rewards available to the investor.

Spousal Maintenance; How New Zealand Stacks Up

How do the New Zealand courts deal with spousal maintenance?
It is important to note that spousal maintenance in New Zealand (from one adult to support the other adult) is different to child support (for the children).

In New Zealand spousal maintenance is payable if, following separation, one party is unable to meet their reasonable needs. If that party can demonstrate that their inability to meet their reasonable needs arises because of one of the qualifying circumstances, then spousal maintenance may be payable by the other party.

The ‘qualifying circumstances’ are slightly different depending on whether the parties were married or in a de facto relationship but include things such as responsibility for care of children, standard of living during the relationship, earning capacity and the effect of the division of functions within the relationship. It is important to note that we have a ‘no fault’ system in New Zealand so it does not matter if one party behaved poorly in the course of the separation.

When considering an application for spousal maintenance, the court will look at the claiming party’s budget of their ‘reasonable needs’ together with the other party’s budget and what that person might reasonably be able to afford to pay.

In New Zealand, spousal maintenance is generally an interim measure and the recipient is obligated to take the necessary steps to support themselves within a reasonable period of time. The precise length of any necessary maintenance payment will largely depend on the circumstances of the parties involved. The obligation to pay maintenance in New Zealand ends when the receiving party enters into a new de facto relationship.

How does this differ from other countries?
Unsurprisingly, the law on this issue varies across boundaries. A few of the most noticeable differences arise in the USA and UK, including:

  • The qualifying circumstances and amount of maintenance payable; and
  • The length of time for which maintenance can be payable.

USA
In the USA, laws on alimony (as it is known) vary significantly across states. In some states, alimony is only awarded in marriages or civil unions of 10 years or longer and domestic violence can be a valid ground to make a claim. In some states, the person who was ‘at fault’ for the end of the relationship may be relevant (i.e. if the party claiming alimony had an affair, that may be a factor in deciding whether they should receive payment).

There are sometimes limits placed on the amount of maintenance payable, such as the lesser of $5,000 per month, or 20% of the paying party’s income.

Other states (such as New York) do not impose the same strict guidelines on qualifying circumstances or amounts of maintenance, and allow judges to make decisions that they consider best in the specific circumstances of the parties.

Across the USA, ‘temporary alimony’ continues to be the most common type of award, with the length of payments sometimes based on the length of the relationship. It is worth noting though, that ‘permanent alimony’ (i.e. payment for life) does exist in some states and is awarded in circumstances which are considered appropriate.

UK
In the UK, the qualifying circumstances for spousal maintenance and the way in which awards are calculated have similarities to New Zealand law. However, what is noticeably different, is the length of time which maintenance payments can continue for.

As is the case in the US, spousal maintenance can be paid for a fixed term (such as until the youngest child turns 18), or it can be payable for life (until the paying party dies). The latter are often coined ‘meal ticket for life’ orders and are widely reported on in the media. These awards appear to have become less common in the UK and the Courts have increasingly applied the ‘clean break’ principle which ends financial ties between separated parties at a point in time which is considered fair.

The 2015 UK case of Wright v Wright made headlines around the world after a Judge suggested that the ex-wife of a wealthy veterinarian should ‘get a job’ to help supplement the spousal maintenance she was receiving, now that the children were over 7 years of age.

Despite this, spousal maintenance in the UK is still considered one of the more generous across jurisdictions and ‘joint lives’ maintenance awards continue to be made. The question as to whether ‘joint lives’ orders are appropriate is hotly debated by lawyers and legal writers, with many calling for law reform in this area.

How does New Zealand measure up internationally?
Spousal maintenance in New Zealand is not as generous as some jurisdictions in terms of the length of time for which it is payable. The very broad and potentially lifelong obligations sometimes seen in the UK and USA, whilst not inconceivable under New Zealand Law, are extremely rare and would arguably be contrary to the spirit and intent of the Family Proceedings Act 1980, which governs spousal maintenance in New Zealand. There is an obligation on the receiving party to meet their own reasonable needs at some stage.

However, our law does ensure that the actual ‘reasonable needs’ of both the claiming party, and the paying party, are taken into consideration. Rather than applying limits to the amount of maintenance payable, each New Zealand case is decided based on the specific circumstances of the individuals involved.