New Zealand’s Specialist
Project Lawyers

Construction Contracts (Retention Money) Amendment Bill

In early June Parliament introduced the Construction Contracts (Retention Money) Amendment Bill which, if passed, will further amend the retention regime under the Construction Contracts Act 2002 (CCA). The proposed changes address shortfalls in the current regime, such as situations where an insolvent contractor has co-mingled retention funds with its working capital, and its subcontractor is barred from recovering the full sum.

The headline changes are:

• Retention money must be held on trust in a New Zealand bank account established and used solely for the purpose of holding retention money (or held in the form of complying instruments such as a bond or guarantee). Bank account names must include “retention money trust account” and identify for whom the money is held. The bank must also be notified that the account is holding retention money under the CCA;
• Contractors must disclose information to subcontractors regarding retention monies when money is first retained, and then at least every three months thereafter; and
• The introduction of offences for failing to comply with the new requirements. Contractor companies can be liable to fines for up to $200,000 whereas directors (or persons who act as a director) can be liable for up to $50,000.

1. All persons who provide professional engineering services must be registered. This would ensure all professional engineers obtain a practicing certificate and are subject to a code of conduct, mandatory CPD, and a complaints and disciplinary process;
2. The introduction of a licencing regime for high risk engineering disciplines. Discipline classes would be established based on the potential for significant harm resulting from subpar engineering work. MBIE recommend making it an offence to practice in a restricted field without a licence, which could be issued by examination, evaluation of work, interviews, and track records; and
3. Establishment of a regulator to oversee the regime. This independent regulatory board would be accountable to the Minister for Building and Construction and monitored by MBIE. Funding for the regulator would come from registration and licencing fees as well as levies.

The case confirms that landowners can be liable for damage caused by their trees despite the trees being outside the “growth limit zones” imposed by the Electricity (Hazards from Trees) Regulations 2003 and despite the owner of the electricity line not having a registered easement for the line.

The electricity line was constructed in the late 1960s or early 1970s by a predecessor electric power board to the current owner of the line, Unison Networks Limited. Section 22 of the Electricity Act 1992 permits Unison Networks to keep the line on the land, and section 23 allows Unison Networks to have access to the land to maintain the line. No registered easement is needed for the line.

The property was acquired by the current owner in the early 1990s and converted to forestry in 1994.

The Electricity (Hazards from Trees) Regulations 2003 sets growth limit zones measured out from electricity lines. The growth limit zone for the line here extended only for 2.5 metres. Under those regulations, line owners can require that tree owners cut or trim trees which extend into the growth limit zones. Here, however, the trees were located outside the growth limit zones, with damage to the line caused by trees falling over during or following adverse weather.

The Court of Appeal agreed with the earlier High Court judgment that the tree owner was liable to the line owner in “nuisance”. A nuisance is an ongoing or recurring activity or state of affairs that causes a substantial and unreasonable interference with the plaintiff’s land or the plaintiff’s use and enjoyment of that land.

Normally a nuisance occurs in the context of neighbouring properties; the defendant will cause something to emanate from the defendant’s land, like smoke or noise, which interferes with the plaintiff’s use of adjoining land. Here, the lines and trees were on the same land but both the High Court and Court of Appeal were comfortable that the tort of nuisance could apply in this situation. As noted by the Court of Appeal, the trees were, in effect, emanating from Nottingham Forest’s land and causing damage to Unison’s property.

The key factor here was the repetitive nature of tree falls. A succession of trees, which had grown to a height greater than their distance from the line, fell onto the line and caused damage. Given the inevitability of tree falls, the Court of Appeal had no doubt that it was unreasonable for Nottingham Forest to allow trees to grow to the height at which they would cause damage to the line if they fell. By creating this state of affairs, Nottingham Forest was strictly liable for any resulting damage, and could not avoid liability by showing that all reasonable precautions had been taken.

This was a novel case, although it pulled together strands of settled law, and could have widespread application especially to commercial forest owners. It clarifies that the Electricity (Hazards from Trees) Regulations 2003 do not oust common law liability for damage to electricity lines caused by trees and that, in circumstances involving a series of events, landowners could be strictly liable for that damage. As shown in this case, liability can exist where the trees are outside the “growth limit zone” but within falling distance of the line, where the trees are otherwise healthy and where the line is protected by a statutory right rather than a registered easement.

Julian Smith from Greenwood Roche advised Unison Networks on this claim, and has advised other electricity lines companies on tree management issues – amongst other things – for more than 20 years. We can also advise forestry companies on their obligations here and the impact on potential plantable areas.

June 2021

What are retentions?
 
Retentions secure performance obligations under a construction contract. A retention is used as a form of security for a party such as a Principal to ensure that the other party (Contractor) performs its obligations under the construction contract. Retentions are generally held until final completion or until the end of the defects liability period.
 
Issues have arisen where the party holding a retention (Party A) has become insolvent, and the party whose funds are being held (Party B) is left unable to access those funds due to the being comingled with the holding party’s other funds.
 
The Bill purports to deal with these types of scenarios.
 
Key Proposed Changes
 
If the Bill passes in its current form, it would mean any party holding a retention, Party A, must hold that retention:

• as soon as possible, either:
  • in a separate bank account or accounts at a registered bank in New Zealand; or
  • in the form of a complying instrument (such as a guarantee or insurance policy) that requires an insurance company or a bank to pay to Party B an amount equal to the retention money if Party A does not pay the retention money to Party B when required by the construction contract;
• on trust (thereby placing fiduciary obligations on Party A as a trustee);
• with adequate recording measures; and
• along with updates to Party B on the status of the retention every three months after first advised.

Associate Finance Minister David Parker said in a statement on 25 May 2021, that “our successful management of the health impacts of the pandemic and the recovery of the economy, with lower unemployment and stronger growth than forecast last year, mean we can remove the temporary protection.”

Transactions entered into from 7 June 2021 will not be subject to the ENR, although transactions entered into prior to this date will still be subject to the notification requirement. Further changes coming into force shortly under the Overseas Investment Amendment Act 2021 mean that the ENR may be reinstated where there is an emergency justifying such reinstatement.

National Security and Public Order Notification regime

The ENR will be replaced by a call-in power – known as the national security and public order notification regime (NSPO).  This regime will apply to transactions entered into on or after 7 June 2021. 

The NSPO regime will apply to investments in strategically important businesses (SIB) that would not ordinarily require consent under the Overseas Investment Act 2005 (Act). The NSPO regime will allow the Government to “call-in” certain transactions and consider whether such investments pose a risk to national security and public order, and gives the Government power to impose conditions on these investments (or if required, to block or unwind the transactions) when it is considered they give rise to significant national security or public order risks. It is intended that the call-in power will be used as a backstop power only and interventions will be rare and only used where necessary. 

Strategically Important Business

A SIB includes a business:

• that researches, develops, produces or maintains military or dual-use technology;
• that is a critical direct supplier to New Zealand’s intelligence and security agencies (refer to LINZ’s website for the list of published critical direct suppliers, but please note that some suppliers will be unpublished);
• involved in electricity generation (with a total capacity exceeding 250 MW), distribution, metering or aggregation;
• involved in drinking water, wastewater or stormwater infrastructure;
• involved in telecommunications infrastructure or services;
• that is a financial institution or involved with financial market infrastructure;
• that is a media business with significant impact; or
• that develops, produces, maintains or otherwise has access to sensitive information (being genetic, biometric, health or financial information) of certain agencies or relating to 30,000 or more individuals.

Keystone Trust’s fundamental goal is to support and enable students who have financial need or have been affected by adverse circumstances to take up tertiary studies in the property sector.

The Trust believe that this can only be achieved by working with others with the same value, vision and integrity – from students to sponsors, friends and supporters. 

Being able to contribute to the future capability and capacity of the property and construction sector through the Trust gives us the opportunity to ‘pay it forward’. Standing alongside a young person as they grow and develop into their potential is an enormously fulfilling experience and one we look forward to doing with Keystone.

As part of this package of initiatives, the Infrastructure Funding and Financing Act 2020 (“Act”) passed its final reading on 22 July 2020 and received royal assent on 6 August 2020. The Act looks to ensure that a lack of funding at local government level does not continue to constrain development. Using the Act, developers can now access a new funding structure that will allow them to raise the funds and finance necessary for large-scale projects themselves (rather than rely on local government), with repayments made by future owners through rates on the developed land.

As noted by Auckland Mayor Phil Goff, “Traditional approaches to infrastructure funding and financing are not working. Constraints on council debt levels means viable infrastructure projects are postponed for years, despite the pressing need for more housing in these high-growth areas.”

The new funding model provides an alternative funding mechanism in a bid to accelerate the development of housing in particular. The Act received cross party support and is designed to complement existing funding tools available to local government.

Milldale Model

The financing structure set out in the Act is modelled on the structure utilised in the Milldale development in North Auckland. For Milldale, a special purpose vehicle (SPV) was set up to oversee a residential development project. The SPV raised initial capital from investors, proposing to pay them back by an annual ‘infrastructure payment’ added to the rates bill. Payments will initially be made by the developer and, in time, by the section owners.

The infrastructure payment obligations are secured by an encumbrance on each title, meaning the obligation to meet the payment runs with the land and binds any subsequent owners. In the Milldale example the payments are $650 + 2.5% interest per annum for apartments and $1000 + 2.5% interest per annum for homes and will last for 30 years.

While the Milldale development is still in the construction phase it is already clear that the model has enabled acceleration of the project and therefore faster delivery of affordable housing in Auckland.

How will The Act Work?

The Act adopts a very similar model to the Milldale model, by allowing the use of multi-year levies in large scale development that place the cost of infrastructure on those who will benefit directly from it. Levies will be able to be proposed for the provision or improvement of the following:
 

• new water services infrastructure;
• transport infrastructure;
• community infrastructure or community facilities; or
• environmental resilience infrastructure.

• The making of a detailed levy proposal to the government;
• The proposal must include, among other matters, details of the SPV proposed, the financing structure and who will be responsible for construction;
• The Minister for Housing and Urban Development as “recommender” will consider the levy proposal with reference to a number of factors and in consultation with the relevant local authorities and make a report to the responsible Minister (a Minister to be confirmed by the Prime Minister);
• The report will include an assessment of the proposal, a recommendation and endorsement from the relevant levy authority;
• The Responsible Minister may then recommend the Governor-General accept the levy (but may not amend the terms of the proposal).

A prominent shift in the new NPS-FM is the incorporation of Te Mana o te Wai as the primary approach to managing freshwater. Te Mana o te Wai is defined in the NPS-FM as “a concept that refers to the fundamental importance of water and recognises that protecting the health of freshwater protects the health and well-being of the wider environment.  It protects the mauri of the wai.  Te Mana o te Wai is about restoring and preserving the balance between the water, the wider environment and the community”.  The NPS-FM identifies a hierarchy of obligations within Te Mana o te Wai that prioritises:
 

• First, the health and wellbeing of water bodies and freshwater eco-systems.
• Second, the health needs of people (such as drinking water).
• Third, the ability of people and communities to provide for their social, economic and cultural wellbeing, now and in the future.

1. Mana whakahaere: the power, authority and obligation of tangata whenua to make decisions that maintain, protect and sustain the health and well-being of, and their relationship with, freshwater.
2. Kaitiakitanga: the obligation of tangata whenua to preserve, restore and enhance, and sustainably use freshwater for the benefit of present and future generations.
3. Manaakitanga: the process by which tangata whenua show respect, generosity, and care for freshwater and for others.
4. Governance: the responsibility of those with authority for making decisions about freshwater to do so in a way that prioritises the health and well-being of freshwater now and into the future.
5. Stewardship: the obligation of all New Zealanders to manage freshwater in a way that ensures it sustains present and future generations.
6. Care and respect: the responsibility of all New Zealanders to care for freshwater in providing for the health of the nation.

• The development of long-term visions. Every council must include the long-term visions as objectives in regional policy statements. The long-term visions must be developed through engagement with the community and mana whenua about their long term wishes for the water bodies and freshwater ecosystems in the region.
• Implementation of the national objectives framework. The national objectives framework is a process that requires regional councils to undertake a range of steps such as identifying freshwater management units and values, setting environmental outcomes and including them as objectives in regional plans, identifying and setting baseline states for attributes for each value, setting targets to support the achievement of environmental outcomes and prepare action plans to achieve those outcomes.
• Developing objectives, policies, methods and criteria for any purpose relating to natural inland wetlands, rivers, fish passage, primary contact sites, and water allocation.

Media have rightly focused on the reduced frequency of rental increases and changes to the termination of periodic tenancies, with these provisions being substantially amended for the first time in over 30 years.

Most residential property landlords will only be able to terminate a periodic tenancy:
 

• by giving 63 days notice if the owner of the premises, or a member of the owner’s family (which includes extended family and whānau), requires the premises as their principal place of residence within 90 days after the termination date; or
• by giving 90 days notice, but only for certain specified reasons. The list of reasons for terminating a tenancy is narrow, and the “no cause” ground has been removed.

Tenants will need to give at least 28 days’ notice to terminate a periodic tenancy – up from 21 days.

A late change was made to allow tenants to withdraw from a fixed-term or periodic tenancy on 2 days’ notice in circumstances of family violence. Any remaining tenants are then able to apply to the Tenancy Tribunal to be released from the tenancy on hardship grounds. A landlord who is physically assaulted by a tenant can terminate the tenancy by giving 14 days’ notice, but only if a charge is laid against the tenant for that assault.

Rent may not be increased within 12 months after the start date of the tenancy or 12 months after the last increase took effect. This applies even if the tenancy agreement (including for a fixed term tenancy) provides otherwise. As with the current Act, rent cannot exceed the market rent and cannot be charged more than 2 weeks in advance.

In addition:
 

• landlords must allow tenants to undertake minor changes to the property (such as hanging pictures and redecorating), subject to certain conditions and provided that the changes do not require a building consent;
• landlords must facilitate the installation of fibre connections to a property, although not if the installation will materially compromise the weathertightness, character or structural integrity of a building;
• landlords must include the rent when advertising properties, and cannot hold auctions or solicit bids;
• fixed-term tenancy agreements will automatically become periodic tenancies on expiry, unless both parties agree otherwise or in limited other situations;
• to evict a tenant for anti-social behaviour (being harassment and activities causing non-minor alarm, distress or nuisance), the landlord will need to warn the tenant (in writing) at least 3 times in a 90 day period of that behaviour before seeking a Tenancy Tribunal order;
• all tenancies (except social housing tenancies where the tenancy agreement prohibits assignment) are assignable with the prior written consent of the landlord, and that consent cannot be unreasonably withheld; and
• financial penalties are increased, generally by 50% or more, but with significant additional penalties potentially imposed where a landlord has 6 or more tenancies.

The amendments also strengthen the Residential Tenancies (Healthy Homes Standards) Regulations 2019 (which set “healthy homes standards” for heating, insulation, ventilation, draughtiness, moisture ingress and drainage) by requiring that landlords retain information about compliance with the healthy home standards and provide that information to tenants on request.

The changes largely result from a public consultation process undertaken by the Ministry of Business, Innovation and Employment in 2018, and driven by the Government’s desire to make life better for tenants in light of home ownership being at a 60 year low and the number of rented properties exceeding 600,000. The changes therefore increase the rights of tenants, and reflect that tenants will often occupy rental accommodation for many years.

We advise a range of social housing and residential property investors on the acquisition, management and disposal of properties. If you would like further advice on the changes to the Residential Tenancies Act 1986, please contact our real estate and property team.

August 2020