New Zealand’s Specialist
Project Lawyers

 The Urgent Measures Bill introduces a number of changes which will reduce the regulatory burden on investors and will also bring in those changes previously detailed in the Overseas Investment Amendment Bill (No 2) that the Government considers are urgently required. These are intended to take effect once the Urgent Measures Bill is in force. The remaining provisions of the Overseas Investment Amendment Bill (No 2) that have not been fast tracked under the Urgent Measures Bill will move into a new bill, the Overseas Investment Amendment Bill (No 3), which will proceed through the usual legislative process, and is expected to pass through Parliament in the next 12 months.
 
The Covid-19 pandemic and the economic downturn have created new foreign investment risk, and the Urgent Measures Bill is intended to stop vulnerable New Zealand assets being subject to foreign takeover during the economic fallout from Covid-19. Speaking of the Urgent Measures Bill, Associate Finance Minister David Parker has said:

“Hypothetically, with international tourism at a standstill the value of a significant tourism company may have plummeted and could be low or near zero. That value would not reflect the importance of the business, so interim controls are needed to protect our national interest.”

The Urgent Measures Bill had its first reading on 14 May, and it is intended to be passed quickly with a shortened Select Committee process. It is anticipated the Urgent Measures Bill will come into force in the middle of June.
 
The key changes under the Urgent Measures Bill are:

• The introduction of a temporary emergency notification requirement for key control transactions that would not ordinarily have been covered by the Act.

• The introduction of the national interest test in respect of strategically important businesses.

• Once the temporary emergency notification requirement is no longer required, the introduction of a right for the Government to exercise a call-in power in respect of both investments in businesses not ordinarily screened by the Act but which may pose significant national security and public order risks, and investments in businesses that hold or generate certain types of sensitive data. This right will also apply to the majority of investments captured by the national interest test.

• Simplification of the overseas investment regime by reducing the number of applications that require screening, bringing forward certain measures set out in the Overseas Investment Amendment Bill (No 2).

These changes are discussed in detail below.
 
Temporary Notification Requirement
 
The temporary notification regime requires certain transactions to be notified to the Government, even if these transactions would not ordinarily require consent under the Act. Under the regime, overseas investors will be required to notify the Government before they proceed with an investment in a New Zealand business that involves:

• the acquisition of a more than 25% interest in a business;

• an increase an existing interest in that business to, or beyond, certain thresholds (being 50%, 75% or 100%), or the acquisition of more than 25% of the business’ assets (by value). This requirement will apply regardless of the dollar value of the investment; or

• the acquisition of property (including goodwill and other intangible assets) in New Zealand used in carrying on business in New Zealand (whether by one transaction or a series of related or linked transactions) of any value that effectively amounts to a change in control of the business.

Once notified, the Minister will then consider whether the investment is contrary to the national interest. The Minister may impose conditions on, or prohibit, certain transactions. It is anticipated that the majority of transactions will proceed without any Government intervention or any conditions imposed.
 
The Urgent Measures Bill requires the notification to be provided prior to transaction closing, in writing. The exact details of the requirement are yet to be prescribed in regulations, but it is anticipated that the investor will be required to provide certain details on the transaction to the Overseas Investment Office, such as  the identity, ownership and control details of the investor, any links to foreign governments, broad transaction details including the nature of the business or property to be acquired and the commercial rationale for the purchase (including as to pricing and valuation). A notification form will apparently be available on the Overseas Investment Office’s website.
 
The Government intends that investors will be notified within 10 days whether a transaction could be contrary to New Zealand’s national interest and subject to a further detailed review, which is to be processed within 40 days and may be extended by up to 30 days. The exact details and timeframes will be set out in the regulations. There will be no fee for submitting a notification.
 
Failure to comply with the notification requirements also means that the Government could later unwind the transaction if it fails the national interest test.
 
Even if not notified formally, the Minister may exercise his or her own discretion and determine a transaction to be contrary to the national interest, with the same potential unwind consequences.
 
The temporary notification requirement will be reviewed every 90 days and will only remain in place while the Covid-19 pandemic and its associated economic impacts continue to have a “significant effect in New Zealand” – a matter open to interpretation at the margins but which potentially could be for quite a long time.
 
Acceleration of the National Interest Test
 
The national interest test will allow the Minister of Finance to deny consent to any investment ordinarily screened under the Act that is considered to be contrary to New Zealand’s national interest (including security, economic and other interests). This power has been modelled on the Australian regime, but with the addition of an express discretionary Ministerial extension of the concept. This power and discretion cannot be delegated to the OIO.
 
Transactions of national interest are broadly defined as transactions already requiring consent under the Act which result in:

• an investment by a non-New Zealand government investor;

• an investment in a strategically important business (for example, military or dual use technology, security and intelligence, electricity and water, telecommunications, financial market infrastructure, significant airports and ports, or any key supplier to these, all as detailed in regulations yet to be drafted); or

• any other investment that the Minister considers could be contrary to New Zealand’s national interest, provided that the Minister has notified the applicant that the transaction is being considered as such.

 Please refer to our previous article here for further details of the national interest test.
 
“Call-In” Powers
 
Once the temporary emergency notification requirement is removed, the Government will have replacement “call-in” powers to review certain investments in strategically important businesses which would not ordinarily be captured by the Act. This power would allow the Government to call in certain transactions, place conditions on or prohibit certain transactions from proceeding where they are perceived to pose a risk of harm to New Zealand’s national security or public order. The call-in power would apply to those types of business captured under the national interest test (excluding large irrigation schemes), and will extend to investments in businesses that hold or generate certain types of sensitive data (for example health or financial data). 
 
Please refer to our previous article for further details of the “call-in powers” (see above link).
 
Changes to simplify the Overseas Investment Regime
 
Certain changes originally introduced under the Overseas Investment Amendment Bill (No 2) are being fast tracked under the Urgent Measures Bill with the purpose of reducing the regulatory burden of the Act. This is in part due to the Covid-19 pandemic, as well as the expected time period for the passage of the Overseas Investment Amendment Bill (No 3) through Parliament.
 
The Urgent Measures Bill proposes to make it simpler to make productive investments in New Zealand by:

• introducing a statutory standing consent in respect of certain New Zealand listed issuers and managed investment schemes;

• reducing the number of fundamentally New Zealand entities that must obtain consent under the Act;

• narrowing the definition of overseas person for all other non-natural persons such that a more than 25% interest must be held by overseas persons before the entity can be deemed to be an overseas person;

• introducing streamlined consent criteria for investments in less sensitive New Zealand land that is only screened because it adjoins land that is sensitive in its own right;

• simplifying the investor test by undertaking more targeted assessments of an investor’s character; and

• reducing the number of small transactions that do not change control of sensitive assets that must get consent.

 Details of these are covered in our earlier article (see above link).
 
If you would like more information on the Urgent Measures Bill or application of the Overseas Investment Act generally, please contact us. We will provide further details of interest on the Urgent Measures Bill and regulations as they become available. 

The Phase 1 reforms, which placed restrictions on the sale of residential land to overseas persons and streamlined the consent process for forestry investment, were implemented in the 2018 changes to the Overseas Investment Act 2005 (Act).
 
The Bill proposes to introduce a number of changes to the Act to enable a more streamlined approach to overseas investment.  It does this by ensuring that the risks posed by foreign investments can be managed effectively, while better supporting productive overseas investment through easing of the regulatory burden of the screening process.
 
We summarise below some of the key amendments:
 
1.       National Interest Test

The introduction of a national interest test will allow the Minister responsible for the Act, the Minister of Finance, to deny consent to any investment ordinarily screened under the Act that is considered to be contrary to New Zealand’s national interest (including security, economic and other interests). This is similar to the Australian regime but gives the Minister much broader discretion to consider what is in the national interest in each case. By leaving some significant detail to determination by regulations, there is scope here for this to be influenced by government policy of the day rather than be limited to traditional “national interest” (ie. security or intelligence) concerns.

Transactions of national interest are broadly defined as transactions already requiring consent under the Act which result in:
 

• an investment by a non-New Zealand government investor;

• an investment in a strategically important business; or 

• any other investment that the Minister considers could be contrary to New Zealand’s national interest, provided that the Minister has notified the applicant that the transaction is being considered as such.

Categories of strategically important businesses that the national interest test will apply to are, subject to the detail of regulations yet to be developed:
 

• businesses that develop, produce or maintain military or dual-use technology;

• critical direct suppliers to intelligence or security agencies;

• telecommunications infrastructure or service providers;

• businesses that generate or distribute electricity;

• businesses involved in designated ports and airports;

• systematically important financial institutions or financial market infrastructure;

• media business that have an impact on New Zealand’s media plurality; and

• large irrigation schemes.

On 13 May 2020, Associate Finance Minister David Parker announced that the introduction of the national interest test will be accelerated, so as to have it in place quickly to help deal with fall-out from the Covid-19 pandemic.
 
In addition, the national interest test will temporarily apply to any foreign investment, regardless of its nature or value, that results in a 25% ownership of a New Zealand business. It will also apply to increases of an existing interest to or beyond 50%, 75% or 100% in a New Zealand business. The Associate  Minister has said that the aim here is to minimise the possibility that cornerstone businesses in our productive economy are sold in a way contrary to our national interest while the pandemic is causing the value of many businesses to fall.
 
In practice, this is to operate as a simple notification requirement and the process is to be quick to ensure investment is not unduly delayed.
 
These temporary powers will be reviewed every 90 days, and will remain in place only as it is necessary to protect essential New Zealand businesses from the effects of the Covid-19 pandemic. The national interest test will remain (with a minimum threshold of $100 million) once the temporary measures end.
 
The Government aims to have the temporary measures in place by mid-June.
 
2.       Call-in Power
 
The Government has proposed a “call-in” power which allows for review of certain investments which would not ordinarily be captured by the Act. This power would allow the Government to call in certain transactions, place conditions on or prohibit certain transactions from proceeding where they pose a risk of harm to New Zealand’s national security or public order. Notification to Land Information New Zealand of these transactions before they are given effect to may be either mandatory or voluntary, depending on the category of the business involved.
 
The call-in power would apply to those types of business captured under the national interest test (excluding large irrigation schemes), and will extend to investments in business that hold or generate certain types of sensitive data (for example health or financial data).  It is expected that this power would be used only in rare circumstances where necessary to protect New Zealand’s interests.
 
3.       Lower Risk Transactions
 
The Bill proposes that certain lower risk transactions will no longer require consent under the Act. These types of transactions include:
 

• Investments in land that are only screened because the land adjoins land that is sensitive in its own right (sensitive adjoining land). The adjoining land criteria has been narrowed, with the aim of reducing the number of transactions requiring consent under the Act. This is a significant change, to be welcomed, as a number of land transactions have to date been covered only because of the nature of adjoining land; 

• Commercial leases or other interests in land of less than 10 years (whether this threshold is reached through a single interest or cumulative interests), being an increase from 3 years in the current legislation – again another significant easing although still not long enough to exclude most major commercial or industrial leasing;

• Investments involving fundamentally New Zealand entities (refer below); and 

• Small transactions which do not grant an overseas investor any control of sensitive assets.

 
4.         Narrowing of the meaning of “overseas person”
 
One important proposed change is to the definition of an “overseas person” as applied to a corporate entity. This is expected to reduce the number of corporate entities requiring consent under the Act.
 
Currently, entities that are 25% or more overseas owned will be an “overseas person” under the Act. The changes proposed mean that a corporate entity will be an “overseas person” only if it is more than 25% overseas owned. This makes sense, 25% being one of several common lower control thresholds for a minority investment that do not give any real control usually, save sometimes on very important decisions. More than 25%, in contrast, denotes the power to block a special resolution.
 
Perhaps more significantly, a New Zealand listed company will only be considered an “overseas person” if more than 50% of its shares are owned by an overseas person or two or more overseas persons cumulatively (the ownership test), or where overseas persons who hold 10% or more shares control the composition of 50% or more of the company’s governing body, or exercise control of more than 25% of the voting power at meetings of the company (the control test).
 
5.       Farm Land Advertising
 
Farm land in New Zealand will be subject to more thorough advertising requirements to allow New Zealanders more of a chance to purchase the land on the open market before it is sold to overseas investors. This includes increasing the minimum timeframe in which advertising must take place, ensuring that the advertising takes place prior to the parties entering a sale and purchase agreement and allowing alternative forms of advertising where appropriate.
 
6.         Streamlined Application Process
 
The Bill proposes to simplify the application process itself, by:
 

• Completing more targeted assessments of an investor’s character and capability in the good character investor test, by only considering serious proven matters, allegations of serious matters where proceedings have begun, and any enforceable undertakings entered into by the investor.  

• Importantly, the Bill no longer requires investors to carry out a full screening process for subsequent investment applications if they have been screened and approved in a prior investment. The investor simply has to prove that there has been no change to the investor test factors, or that any changes do not make the investor unsuitable to own New Zealand land.

• Simplifying the ”benefit to New Zealand” test in some very practically significant ways:
   

  • Changing the counterfactual assessment requirement so that a “before and after” the investment assessment is completed, rather than “with and without” (it seems this is effectively a quiet reversal of the hugely problematic Crafar Farms ruling, that resulted in a significant degree of crystal ball gazing about what other potential investors would have done to add benefits); 

  • Introducing a proportionate approach to the test, taking into account the sensitivity of the land and the nature of the overseas investment – a very commonsense amendment;

  • Removing the requirement for ”substantial and identifiable” benefit for non-urban land greater than 5 hectares; 

  • Introducing a test for determining whether there will be a negative impact on water quality or sustainability where the investment involves extraction of water for bottling or bulk consumption; and

  • If the acquisition involves more than 5 hectares of farm land, there is a higher threshold for demonstrating the benefit to New Zealand as a reflection of its significant economic and cultural importance.
     

• Following criticism of the lack of formal time frames, the Bill introduces statutory time frames for decisions to be made by the regulator. These will be set out in Regulations. Applicants will not be entitled to any relief if the timeframes are not met, and the timeframes do not create any legally enforceable right against the relevant Minister or regulator. 

7.       Increased Cost of Non-Compliance
 
The penalties for non-compliance with the Act have been significantly increased, raising the cap from $300,000 to $500,000 for individuals and from $300,000 to $10 million for all other applicants. The Overseas Investment Office will also be able to enforce undertakings given by overseas investors in Court, and may seek injunctive relief from the High Court in relation to steps to be taken (or not taken) by such investors.
 
The Government had planned to pass the Phase 2 reforms of the Act prior to the general election in September 2020, but the timeline for the Bill and its passage to enactment are now unclear due to the Covid-19 situation.  We will await further announcements on this Bill.
 
These are fairly significant amendments to the regime and it is surprising how quietly they have been slipped into Parliament and how little commentary they have attracted. Overall, though, they are to be welcomed.

Alternative Monetary Threshold for Australian Investors
 
In addition to the proposed changes to the Act, on 15 April 2020 the alternative monetary thresholds in respect of overseas investments in significant business assets by Australian investors were announced for the period 1 January 2020 – 31 December 2020.  These thresholds are:
 

• $536 million in respect of Australian non-government investors; and

• $112 million in respect of Australian government investors.

These thresholds are adjusted each year in accordance with the formula set out in the Overseas Investment Regulations 2005, and are relevant in the application of section 13 of the Act.
 
Please contact us if you would like further information on the changes proposed in the Bill, the recent announcement regarding the alternative monetary thresholds in respect of Australian investors, or the temporary Covid-19 measures.

Although the Bill has not yet been released, the Minister for the Environment has indicated that the fast track process will apply to both resource consents and designations and will allow those projects that meet the criteria to be determined by an Expert Consenting Panel rather than progressing through the usual RMA processes. The Expert Consenting Panel will be chaired by a current or retired Environment Court Judge or senior lawyer and will also contain a person nominated by the relevant councils and a person nominated by the relevant iwi.
 
Decisions made by the Expert Consenting Panel will be issued within 25 working days after receiving comments on an application (with some large scale projects the timeframes will increase to 50 working days). Treaty of Waitangi settlements will be upheld, as will the sustainable management purpose of the RMA and existing RMA national direction. According to Minister Parker, “once a project is referred to the Panel there is a high level of certainty the resource consent will be granted”.  
 
Appeal rights will be limited to points of law and/or judicial review in the High Court, with one further right of appeal to the Court of Appeal.
 
Minister Parker has indicated that the types of projects that could benefit from quicker consenting include “roading, walking and cycling, rail, housing, sediment removal from silted rivers and estuaries, new wetland construction, flood management works, and projects to prevent landfill erosion”. 
 
The changes to RMA process would be temporary, lasting approximately 2 years, and the Government aims to pass legislation as early as June.
 
In terms of cross-party support for the fast-tracked process, we understand that the Green Party holds concerns about how iwi and environmental activists will be able to participate and have therefore indicated they will only support the Bill for its first reading before reassessing having reviewed public submissions. National have indicated they will likely consider the changes “favourably” once details are available, on the basis the proposal is a confirmation that the RMA is not “fit for purpose”. NZ First and ACT also appear supportive.
 
The Environmental Defence Society has likewise signalled hesitant support for the proposal given its focus on environmental enhancement, noting “Overall, it looks like the legislation will avoid sacrificing environmental standards and has focused mostly on speeding up decision-making. Given the exigencies of this C19 world, the outline of the proposed bill looks like an appropriate response”.
 
The fast-tracked RMA process has the potential to see many projects get underway earlier than could have been achieved under “business as usual” RMA processes. We consider that an important consideration of in the drafting of fast-track legislation should be the lessons learnt in the Christchurch and Kaikoura contexts, where fast-track processes have been utilised (and are still able to be utilised) with success. We have considered the Christchurch and Kaikoura experience here.
 
We look forward to updating you with further details when the Bill is introduced.

Of the numerous support measures, $2.1 billion is being allocated towards reinstating depreciation on commercial and industrial buildings, including hotels and motels, but excluding residential properties.

Before 2010, owners of residential, commercial and industrial property in New Zealand were able to claim a tax deduction for building depreciation. This was an important feature of property investment, as it enabled the investor to claim an annual expense reflecting the assumed deterioration of the building, thereby spreading the cost of buying and improving a building over its useful life.

Tax depreciation for buildings was removed in 2010 in conjunction with a number of other tax changes such as increasing the rate of GST and lowering the corporate tax rate. This was on the basis that (amongst other things) Treasury’s analysis of QV data over the preceding 15 year period indicated that, on average, residential buildings in New Zealand, and arguably also commercial buildings, did not depreciate.

In 2018, the Tax Working Group observed the limitations of Treasury’s 2010 analysis and concluded that:

• buildings do in fact depreciate and the international evidence is especially strong for industrial and commercial buildings; 

• New Zealand is a clear outlier in the OECD in not allowing any depreciation deductions for commercial or industrial buildings, resulting in an effective marginal tax rate for ownership of these assets which is higher than in every other OECD country; and 

• tax depreciation for commercial, industrial and multi-unit residential buildings should be reinstated at a 2% straight-line or 3% diminishing value rate.

The Government has now adopted this recommendation in respect of commercial and industrial buildings and, from 1 April 2020, these buildings are once again able to be depreciated, although at lower rates of 1.5% straight-line or 2% diminishing value. The capital cost of seismic strengthening is now depreciable – a matter which has been the subject of much debate over the last decade. These depreciation measures are being announced as permanent changes.

The depreciation deductions will assist hotel and motel owners impacted by the pandemic and building owners affected by reduced rental income. The intention is to encourage investment in new and existing buildings and improve business confidence. While this might be difficult to achieve in the short term, those with a longer investment horizon should benefit from the return to depreciation allowances which make this asset class a more tax efficient investment than many others.

On 15 April 2020, the Government announced further tax changes which will apply to small to medium enterprises (SMEs) only. These include:

• a loss carry-back scheme which allows SMEs which experience losses in either the 2020 or 2021 tax year to carry the loss back and offset against profits in the preceding tax year (estimated to cost $3.1 billion over the next two years); and

• relaxing the tax loss continuity rules so that SMEs which experience a change in ownership of greater than 51% do not have to forgo their tax losses, as previously required, and can use these to offset profits in later years (estimated to save SMEs $60 million per year). 

The Government has issued the Health Act (Covid-19 Alert Level 3) Order 2020 (Government Order), which sets out the requirements for businesses operating under Alert Level 3. The restrictions in the Government Order are non-exhaustive and should be considered in conjunction with other Government directives and guidance for specific industries.

Operating from your premises

Depending on the nature of a business, the Government Order prescribes the circumstances in which the business may open from its premises:

Physical distancing measures are set out in the Government Order by reference to the type of business. For most businesses, this means having systems and processes in place which:
 

• ensure people remain 1 metre away from other people or, if closer, are there for less than 15 minutes, so far as is reasonably practicable taking into account the nature of the business; and

• mitigate the risks that arise to the extent that the above distance requirements are not fully maintained.

Unless a business implements the required infection control measures, it must remain closed. The Government has also asked that everyone that can work from home should do so, although this is not included in the Government Order.

Abatement of rent

A number of clients are now enquiring as to how the Alert Level 3 restrictions impact on any rent abatement provisions in commercial leases. Where a lease contains the commonly-used ADLS “no access in emergency” provision (or similar), for the clause to apply the emergency must “prevent the tenant from accessing the premises to fully conduct the tenant’s business”.

As at Alert Level 4, each lease must be assessed on a case by case basis.

Under the Government Order, most premises may only open if the necessary infection control measures are implemented. It is worth noting that the position on the Government’s https://covid19.govt.nz/ website is more restrictive than the Government Order – for example, on the website people are encouraged to work from home if they can. From a legal perspective, the Government Order is the source of legal restrictions, not the website, but the wider directives and guidance issued by the Government will still be relevant in assessing the restrictions applicable to each particular premises.

A tenant should provide its landlord with details of the extent to which its ability to operate fully from the premises is prevented due to the Government restrictions as a whole. Under leases containing a rent abatement provision such as clause 27.5 in the ADLS Sixth Edition, a fair proportion of rent and outgoings should then be abated based on this information. Regarding the main categories of commercial tenants:
 

• Many hospitality and retail tenants are now operating from their premises in a limited capacity, allowing for contactless pick up of online orders, for example. While this may allow part of the premises to be utilised for the tenant’s business – such as a restaurant or café’s kitchen, or a retail tenant’s storage space – this is not a full operation of the tenant’s business or the premises. While the proportion of rent and outgoings that cease to be payable will be less than that at Alert Level 4, some abatement will likely still apply.

• Office tenants are now able to access their premises, but many cannot operate fully from the premises, for example they cannot admit customers or clients and must maintain physical distancing. Others will be able to fully operate, for example if they seldom admit customers or clients and have workstations already sufficiently separated. Depending on the level to which a tenant is able to operate from the premises, a fair proportion of rent and outgoings may still cease to be payable under a no access provision.

• Many warehousing and industrial tenants are now operating, although this may be at a limited capacity. Again, each tenancy needs to be assessed on a case by case basis as to the extent that the tenant is able to operate from the premises.

The no access provisions are based on the ability for a tenant to access the premises to operate its business, not whether or not it chooses to implement the necessary infection control measures and begin to operate. Any abatement should therefore be based on the legal restrictions for each premises, together with Government directives and guidance, and not the discretionary actions of the tenant.

Given the rapidly changing situation and uncertainty around future alert levels, it is recommended that landlords and tenants continue to work together to agree on a position for Alert Level 3 that is satisfactory to both parties. This position will need to be reconsidered at Alert Level 2 once specific restrictions for that alert level are announced. It is anticipated that the majority of premises will be able to reopen at Alert Level 2, potentially with fewer associated restrictions, and therefore the no access provisions in leases will likely have a diminished impact and, in some cases, may cease to apply.

If you have any questions about how the Government Order affects your lease, please feel free to contact any of our commercial property lawyers.

1. Change the regulatory environment.  For example, directly amend, or enable the amendment of, Resouce Management Act 1991 (RMA) documents to provide a more favourable planning environment for the desired development(s).

2. Change the decision-maker. Recognising the constraints on decision-making in the local government context, extract that authority for specific projects and grant it to an independent body or, more commonly, a Minister.

3. Change the decision-making framework. The RMA was designed to promote the sustainable management of New Zealand’s natural and physical resources. Decisions made under it (including development of the various planning documents) must accord with that purpose; a purpose which has been the subject of nearly 30 years of examination by the courts, and which inevitably requires the assessment and, where possible, the reconciling, of a wide range of complex and often competing considerations. That assessment carries implications for time, cost and risk. In certain circumstances (significant rebuild as a result of natural disaster or pandemic for example!) that assessment requirement may not remain appropriate. In such instances it may be appropriate to reframe the assessment such that particular outcomes are elevated (e.g. the recovery and regeneration of cities and communities).

4. Change the way people participate. Reconsider the opportunity for public participation – can it be streamlined and utilised where it is most effective, for example, in the early stages of vision or outcome development. Rather than prescribed legal requirements, consider placing strong obligations on development agencies to encourage participation effectively and creatively. Require that participation to be documented and reported on – how have the views of the public be considered and responded to in the finished product? Remove appeal rights.  Retain ability to challenge statutory decision-making processes through judicial review.

The following table illustrates how each of the above levers has been used in existing or now-repealed special-purpose statutes. It also includes comments on the relative effectiveness of these statutes, drawing on our experience utilising and advising on them.  Please click to view the Table.

1. in the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next 6 months as a result of the impact of COVID-19 on them or their creditors;
2. the company was able to pay its debts as they fell due on 31 December 2019; and
3. 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 or they are likely to able to reach an accommodation with their creditors).

• directors will have to meet a threshold before being able to access the business debt hibernation regime and putting a proposal to their creditors - presumably this is referring to a total debts or reduced revenues threshold rather than some turnover threshold, but could also include a requirement that there be a reasonable prospect of the resumption of normal trading;
• creditors will have a month from the date of notification of the proposal to vote on it, with the proposal going ahead if 50% (by number and value) agree and subject to any conditions of their agreement – it seems this does not rule out an earlier approval, which could well need to be engineered given the immediacy of some of the likely COVID-19 liquidity issues; and
• there will be a one month moratorium on the enforcement of debts from the date the proposal is notified and a further 6 month moratorium if the proposal is passed.

"Essential Work" is defined here. In summary, any work required to protect people, property or the environment from imminent risks or to support essential services is deemed “Essential”.  

The escalation to Alert Level 4 on 26 March, and the associated shutdown, required immediate action to secure construction sites across New Zealand and ensure people returned home safety.  Every party in the construction industry is now considering their rights and obligations under their contracts as well as how best to mitigate the cost and time risk.   

In the attached Contractual Summary table, we have identified the likely clauses in the NZS 391X, CCCS and Master Builder forms of contract relevant to the current situation. We can also advise on the effect of the current situation on construction work contracted under any other form of contract.

Some practical tips:

Notification

Notification is usually a pre-requisite for any claim for time and money. Even if there are no time bars, prompt notification of delay and cost escalation will generally be required. The Alert Level 4 shutdown may have time and cost consequences which are largely unknown—and it is fine to state that. 

Evidence of cost and delays 

For claimants, it will be important to keep good records of costs to make it easier to compile a claim later. Most delay claims are assessed against a programme’s critical path: it could be useful to think ahead about how to reschedule and resequence works over the next 4 weeks (or more). 

Mitigation

Contracts often require mitigation—with a failure to do so reducing a party’s entitlement to relief (e.g. extra time and/or payment).  What steps could the parties take to mitigate costs or delays?
 
In particular, where variations are accepted, we expect that any stated working day rate will be the subject of much scrutiny in the coming weeks, as principals and engineers look to understand how such rates are made up and then move to manage cost and identify any duplicated items within contractor claims. 

We also expect that principals and engineers will require far greater transparency and close ongoing involvement in the mitigation and management of any variation claims than would usually be expected. The nature of the lockdown (and the lack of progress on-site) allows the parties time to stop and consider such matters, and to collaborate more effectively than would usually be the case.

Health and safety

COVID-19 presents risks to projects: both for the provision of essential services during Alert Level 4 and potentially beyond. Parties should ensure that their work health and safety policies and procedures are up to date and appropriate.

Seek a fair deal

Regardless of what the contract says, parties are free at all times to negotiate a solution that best fits the situation. In the present case, there may be some goodwill given the unprecedented magnitude of COVID-19. 

There is nothing to stop parties talking to each other about a solution that best fits their project and about how both parties can work together to minimise the impacts of COVID-19 to mutual benefit.

Clear the emails, reset relationships and consider the next project

Whilst the lockdown is having severe effects on the Construction industry, it also affords all parties a unique opportunity to reset project relationships and use the time meaningfully to advance or resolve existing issues on a project. The time can also be used to optimise design, programming and pricing; and prepare to recommence and complete the project as efficiently as possible. For example, we expect most contractors will be entitled to an extension of time resulting from COVID-19: parties could be looking to either ask or propose acceleration plans to mitigate delays.   

At the front end, for principals with a secure programme of future work, this is a great time to consider the next project: most contractors are at home and many are considering what comes next.  It is an opportunity to begin engaging on the next project wherever possible to make use of any capacity in the system.

We have put together a “quick reference” guide to the relevant clauses in NZ standard construction contracts (covering the NZS3910 and NZS3916, ACENZ Consultancy Agreement the Master Builder Subcontract Agreement). Please click on the link below to access this summary.

covid-19-impact-on-construction-contracts.pdf