Spring 2010

This issue:

• What happens when the earth moves?
  The recent dramatic events in Christchurch and surrounding areas have highlighted the need for property owners and business operators to ensure they are well protected from business and property damage and risk.  more
• Understand the Rent Review process
  A recent case demonstrates the need for landlords and tenants to fully understand the rent review processes in their leases, and to have proper processes to ensure these run smoothly.  more
• Make your intentions clear
  This case demonstrates the necessity of ensuring that the clauses in a contract not only outline the facts of the particular situation, but also reflect the intentions and expectations of the parties.  more
• Residential Tenancies Amendment Act 2010
  This Act was passed on 20 July 2010 and will affect a large number of New Zealanders, both tenants and landlords.  more
• Personal guarantees - understand the consequences
  A recent High Court case delivers a very strong message that an individual intending to sign a contract as a personal guarantor should take proper professional legal advice.  more

What happens when the earth moves?

The recent dramatic events in Christchurch and surrounding areas have highlighted the need for property owners and business operators to ensure they are well protected from business and property damage and risk.  A number of issues have been identified as of significant relevance including:

• what happens where there is a binding agreement for sale and purchase of either a business or a property, damaged as a result of a natural disaster?

• what type of insurance cover should a prudent property owner or business operator have to ensure they are best protected in the event of such a natural disaster?

Sales and Purchases

In relation to property sales and purchases, the current and most commonly used REINZ/ADLS form provides that:

• the property and any chattels in the property are at the risk of a vendor until possession is given and taken (this is normally the settlement date);

• should the property be destroyed or damaged, and if such destruction or damage has not been made good by the possession date then:
  • if the property is untenantable the purchaser may:
    • complete the purchase, at a price less the sum equal to any insurance moneys received or receivable by the vendor (although no reduction is made where the vendor's insurance company has agreed to reinstate for the benefit of the purchaser); or
    • cancel the agreement.
  • If the property is tenantable, the purchaser must complete the purchase at a purchase price less the sum equal to the amount of reduction in value as a result of the damage or destruction.

It all appears simple but, as a result of recent events, it is becoming clear that it is going to take a long time for insurance companies to actually process claims and assess payouts given the huge demands being made on them.  In addition, insurers are very cautious about putting cover in place for properties under contract but yet to be settled.  At the moment it is becoming virtually impossible to confirm insurance without full geotechnical and engineering reports.  With the continuing aftershocks a report that is valid today may not be so tomorrow. 

The Law Society and the Insurance Council of New Zealand have offered practical advice as best they can but in terms of straight contractual obligations there is no ready solution given the current uncertainty and instability.

Reducing Risk

Having basic insurance cover on a building or a business is of itself likely to be inadequate.  At the very least where a property returns an income to an owner or obviously where there is a business operating, business (or income) interruption insurance does now appear to be a necessity.

Insurance cover on business assets or a building might cover the capital reinstatement costs of an owner/operator.  Many property owners or business operators have financial arrangements with third party lenders or perhaps suppliers.  They need to consider having some of the risk of ongoing financial commitments to others covered off by insurance protection.

Added to this, further complications arise when a business operator has employees.  Employers will need to deal with often stressed employees, who need financial assistance or are reliant on incomes, even though the business is itself not generating any income.  Dependent on employment agreements, employers' obligations would normally be:

• if the workplace is not unsafe, and if employees are willing and able to work, the employer is obliged to provide the employee with work (and to pay the employee accordingly);

• if the workplace is unsafe, the starting place is the employment agreement.  However, its provisions are unlikely to be a complete answer.  Consistent with employer's obligations to communicate in good faith with its employees, agreement should be reached on flexible arrangements (including employees taking annual holidays or leave without pay, or to agree to reduced pay and part-time employment);

• if agreement cannot be reached, employers may have no option but to 'lock out' employees on health and safety grounds;

• the usual sick leave provisions will apply in the event that an employee is unable to come to work, if the employee is sick or someone who depends on them for care is sick. 

Some employers will be insured for business interruption, covering the payment of wages and salaries while the business is closed.  Employers should check with their insurers before making decisions about how to respond, so as not to jeopardise their cover. 

For property owners with buildings generating an income, irrespective of what insurance an owner might have there is the added complication of the tenant probably struggling to meet obligations under a lease because of the same natural disaster.

Under the standard Auckland District Law Society lease form (and most other leases in general circulation), the tenant acknowledges that they occupy the leased premises at their own risk.  There is however no positive covenant on the tenant to maintain insurance cover for their business, to report or provide details to the landlord of such cover, nor to maintain adequate insurance cover in all circumstances (although it would be up for debate what "adequate" means).

When the building is reinstated and operable, and assuming a lease hasn't been cancelled because damage has been too severe, the tenant will again need to meet contractual obligations.  Unless that tenant can call upon its own business risk planning, things may not end well for either the landlord or the tenant.

It could well be that, with the benefit of hindsight following the recent Canterbury catastrophe, drafters of commercial leases acting on behalf of landlords will be taking a positive interest in insurance arrangements entered into by tenants.

For more information please contact: Deborah Miller, Ian McCombe, Chris Paterson or Howard Johnston (Partners, Commercial Property)

Understand the Rent Review Process

Arecent case demonstrates the need for landlords and tenants to fully understand the rent review processes in their leases. 

The case involved Tournament Parking Limited (Landlord) and The Wellington Company Limited (Tenant).  The rent review clause in the relevant lease provided for rent reviews every three years with any increases to be in accordance with the average increase in ground rental for each period in respect of commercial properties in the vicinity. The Landlord reviewed the rent in 1990 but not again until 2008 when it reviewed the rent for the triennial period beginning 18 April 2008, and also for corresponding periods in 2005, 2002, 1999, 1996 and 1993.   The Tenant challenged the Landlord's right to the retrospective reviews.

The District Court held that a rent review had to be triggered within the three year period to which the review applied and that "time is of the essence" (which means that the review had to be done within that time frame without leeway) so the Landlord could not retrospectively review rent for earlier periods.  The Landlord appealed this decision.

The High Court concluded that the principles regarding time and rent review clauses are subject to:

• the language used in any lease in its factual settings; and
• the effect of the circumstances surrounding the exercise or non exercise of a right of review. 

It was noted that the lease fixed no time by which the rent review had to be completed and no provision was contained in the lease to arbitrate new rent.  The lease was also silent regarding the timetable or process for dealing with delay.   While expressing sympathy for the Tenant the Court  allowed the appeal which leaves the Tenant with rent increases for the past 15 years.  However, the High Court noted that the Tenant may be able to recover damages for the Landlord's delay.

For more information please contact: Deborah Miller, Ian McCombe, Chris Paterson or Howard Johnston (Partners, Commercial Property)

Make Your Intentions Clear

This case demonstrates the necessity of ensuring that the clauses in a contract not only outline the facts of the particular situation, but also reflect the intentions and expectations of the parties.

Mana Property Trustee Limited (Vendor) and James Developments Limited (Purchaser) entered into an agreement for sale and purchase of vacant land in an industrial subdivision.  As the land was undergoing a subdivision at the time, the agreement included a clause recognising that a boundary adjustment would be necessary before settlement could occur.  In particular, the agreement noted that the area contracted for be "4.7161 hectares more or less".  Further, clause 18.3 provided that the final area as shown on the approved survey plan would be no less than 4.7150 hectares.  By settlement date the Vendor had deposited a plan and obtained a certificate of title for only 4.6990 hectares.  The Purchaser cancelled the contract, without issuing a settlement notice, on the basis that the Vendor had failed to comply with clause 18.3 which the Purchaser considered was an essential term.

The Vendor sought an order in the High Court for specific performance of the contract by the Purchaser, applying for summary judgment on the basis that that no express agreement had been made that clause 18.3 was essential.

The High Court found that clause 18.3 was not so important to the Purchaser that it would not have entered into the contract without it.  The High Court also commented that a minor variation of the size of the land (160m2 being 0.031% of the area) from that stipulated in clause 18.3 did not go against heart of the contract.  As such the Purchaser was not entitled to cancel the contract because there was no express agreement that clause 18.3 was an essential term.  The Court accordingly granted an order for specific performance providing that the Purchaser should perform its obligations under the agreement.

The Purchaser appealed this decision to the Court of Appeal which disagreed with the decision of the High Court.  The Court of Appeal` held that a combination of a right to adjust the area, within agreed limits, on payment of the settlement funds, and the imperative language of clause 18.3 determined that performance was essential to the Purchaser.  The Court of Appeal concluded that clause 18.3 had been breached and the Purchaser had validly cancelled the contract.

The Vendor then appealed to the Supreme Court to consider whether clause 18.3 of the contract was an essential term, and, if it was, whether the Purchaser was entitled to cancel the contract by the notice it gave to the Vendor on 3 November 2008, without a settlement notice under clause 9 of the general terms of sale of the agreement form.

The Supreme Court held that the parties must have agreed the performance of clause 18.3 was essential for the Purchaser and that the Purchaser would not have entered into the agreement otherwise. The Court considered the language and overall context of the contract indicated that clause 18.3 was intended by both parties to be strictly complied with, and as a result, substantial performance of the essential term by the Vendor was insufficient. 

The Supreme Court also found that if the Purchaser had issued a settlement notice under the agreement, then the Vendor would have had time to fix the problem by correcting its plan and achieving compliance.  It was also noted that the Vendor had never taken the position that it would be unable to comply with its obligation.  The Vendor's appeal was allowed and the Supreme Court declared that the Purchaser's cancellation was invalid. The proceedings were then referred back to the High Court for the outstanding questions to be determined in light of the Supreme Court's judgment.  The outcome is pending

For more information please contact: Deborah Miller, Ian McCombe, Chris Paterson or Howard Johnston (Partners, Commercial Property)

Residential Tenancies Amendment Act 2010

The Residential Tenancies Amendment Act 2010 (Amendment Act) was passed on 20 July 2010 and will affect a large number of New Zealanders, both tenants and landlords. 

When enacted, the Residential Tenancies Act 1986 (RTA) was intended to balance the interests of a landlord, to ensure their property and income would be protected, and those of tenants, to ensure that sufficient security of tenure and the right to quiet enjoyment would be protected.  With such varying, and conflicting interests, there will always be matters which are more favourable to one side or the other. 

In relation to the changes contained in the Amendment Act, the following are perceived to be positive outcomes for landlords:

• A greater number of unlawful acts are specified, which are attributable to tenants.  Damages amounts which are payable by tenants upon certain acts have been set down.  For example, if a tenant quits the premises without reasonable excuse then the landlord may have exemplary damages of $1,000 applied against the tenant, or if the premises are used for an unlawful purpose this will give rise to a claim of damages for $1,000.

• A landlord now has additional options for disposing of goods left on the premises. They can now immediately dispose of goods if the value of the goods is less than it would be to store, transport and sell them, although personal items and documents are to be surrendered to the police.

• Body corporate rules are deemed to form part of a tenancy agreement.

There are also changes in the Amendment Act which are more favourable for tenants, such as:

• Many of the fines that can be imposed on landlords have increased. For example:
  • the possible fine for unlawful entry has increased from up to $500 to up to $1,000;
  • the possible fine for unlawful discrimination has increased by $1,000 to $4,000.

• There is a new Section regulating boarding house tenancies.

• Filing fees for a successful Tenancy Tribunal hearing are to be refunded by the unsuccessful party to the party making the application.

The changes arising from the Amendment Act come into force later this year when supporting regulations have been drafted and approved.

For more information please contact: Deborah Miller, Ian McCombe, Chris Paterson or Howard Johnston (Partners, Commercial Property)

Personal Guarantees – Understand the consequences

A recent High Court case delivers a very strong message that an individual intending to sign a contract as a personal guarantor should take proper professional legal advice prior to signing any document which contains a personal guarantee condition of supply.

Under the letterhead of Junction Ski Shop Limited (Junction Ski), Ms Inkster applied to Mountain Wear 2004 Limited (Mountain Wear) to open an account to supply sporting goods stores in Ohakune.  Ms Inkster completed the account application form and signed it as director of Junction Ski.

Conditions of supply included:

When Junction Ski defaulted on its payments under the contract, a claim was made by Mountain Wear against Ms Inkster as a personal guarantor to the transaction.  Ms Inkster argued that there was no basis for the claim that the guarantee had been signed by her personally.  Ms Inkster said that she had assumed that she was signing only on behalf of Junction Ski. 

The Court held that the key to the case was what the written agreement actually contained. 

In this case, although the wording of the document "by offer of extending personal guarantee" was clumsy, the meaning was clear.  The application required a personal guarantee which was accepted by Ms Inkster as signatory.  This was not a case where the terms of the guarantee were so confusingly drafted that it might have been possible for the person signing it to construe it in such a way that it did not promise a personal guarantee.

For more information please contact: Deborah Miller, Ian McCombe, Chris Paterson or Howard Johnston (Partners, Commercial Property)

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Last updated: 28 September 2010

The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.