New Zealand’s Specialist Project Lawyers

The enabling works comprise excavation and removal of existing building slabs, earthworks and dewatering, and piling required for the foundations of the hospital buildings.  These works will be underway shortly, with the first piles due to be installed by mid-May.  The $1.4 billion new Dunedin Hospital will support the SDHB’s continued provision of high quality health services throughout the lower South Island, and will be a key urban landmark for Dunedin, testament to the city’s long-standing role in health provision and health education.
 
Lauren Semple, Rachel Murdoch and William Hulme-Moir have been advising the Ministry on all consenting matters relating to the new Dunedin Hospital including applying for and obtaining Ministerial approval to utilise the COVID-19 Recovery (Fast-track Consenting) Act 2020.  The new Dunedin Hospital is one of two recent projects that the team have successfully consented via this fast track route.  Subsequent stages of the Dunedin hospital project will consent the above ground works for the new Inpatient, Outpatient and Logistics buildings.
 
The obtaining of resource consent has progressed in parallel with the acquisition of property rights for the development. Julian Smith led our team advising the Ministry on those property rights.

The upgrade, undertaken through difficult terrain and in challenging weather conditions, provides transmission capacity for the possible closure of the Tiwai Point aluminium smelter or for new renewable generation in the area.

Greenwood Roche again assisted Transpower with landowner negotiations along the route of the line, including preparing the agreements, negotiating terms with landowner representatives and completing easement documentation.

Have you memories of a long school building surrounded by sun-baked asphalt and playing fields, quite possibly with not a shade tree in sight? Our client solarZero has launched a new project to generate solar electricity off school roofs across the country.

With financing made available by New Zealand Green Investment Finance, the solarZero Schools initiative enables solarZero to deploy distributed solar generation across schools, demonstrating to future generations in a tangible way what a low carbon world can look like.

The 20 year contract we have helped solarZero develop provides solar energy services to the school for no up-front cost and with long‑term fixed costs at a price below the current cost of retail electricity, making it an attractive option for schools. Across the school sector there is scope for up to 200MW of solar power over time which is a significant contribution to current renewable energy targets.

The long-term contract contains some novel features, being required to operate within the regulatory framework for New Zealand state schools and meet the requirements of the Ministry as school property owner.

Our work here builds on significant experience across different team members’ work on previous hotel transactions, including large international hotel chains throughout New Zealand.

Our work included advising on and implementing the joint venture structure, undertaking due diligence on the property, assisting with the financing of the transaction and settling the acquisition.

The acquisition was part of Ngāi Tai ki Tāmaki’s Deed of Settlement with the Crown, which was finalised in 2018, and included the leaseback of the land to the Ministry of Education.

Our work involved drafting and negotiating land occupation and easement documentation with the Westland District Council for the deaeration chamber and the pipeline and drafting construction contracts for the two stage pipeline project.  The pipeline and deaeration chamber due for completion in the first quarter of 2021 will convey treated wastewater from Westland Milk’s Hokitika dairy factory, remove the air and discharge it into the ocean via an 800 metre underwater pipe.  The company considers it is a more acceptable environmental solution and more sustainable system than the current system of discharge into the Hokitika River.

Greenwood Roche lawyers Bob Roche and Sam Green recently assisted ACC with the development of a new office building in Dunedin through a 50/50 partnership with Ngāi Tahu.

The Dunedin hub is essential for ACC’s national operations and this purpose-built four-storey complex will house 650 staff who are currently spread across four separate buildings.

Construction of this modern and environmentally friendly building is set to start this year. The 8,000 square metre building will be located on Dowling Street.

Our work involved negotiating and documenting agreements for sale and purchase for various land blocks, due diligence, overseas investment office applications and various ancillary documentation.

The Model is science’s best estimate of the likelihood and strength of earthquakes across New Zealand and the review is a big deal – it has taken two-and-a-half years and will reflect the significant advances in knowledge since the last update in 2010, including from international best practice and the Canterbury and Kaikōura earthquakes. The impacts of change will be significant: end-users of the Model, including MBIE, EQC, local authorities, NZTA, land use planners and the insurance sector all rely on the Model to estimate the impact of earthquakes on land, buildings, and infrastructure. This in turn underpins government policy, public and private sector investment decisions and helps to increase resilience. 

While many uses of the Model are forward-looking, the review will have immediate impacts on the property sector, particularly for building owners and tenants. One effect will be the update of structural design requirements under the Building Code, which the Model directly informs. The current structural design standard, NZS1170.5, was based on an earlier 2002 Model, so revision of the Model and design standards is overdue. The Seismic Risk Working Group is currently considering how new Model outputs will be incorporated into the building code, but, in general terms, an increase in assessed seismic risk can be expected to mean an increase in structural design requirements. Any changes there will have obvious implications for the design and cost of new buildings.

The most immediate and significant impact for the property sector, however, is likely to be on the seismic standard of existing buildings. In short, this is because an increase in Building Code requirements for new buildings will mean a decrease in the relative compliance of existing buildings. Existing buildings face being downgraded as new building standards move on.

How far existing buildings will be affected depends upon the degree of change to the Model and the Building Code, but the outlook isn’t promising. A recent paper by Professor Brendon Bradley of the University of Canterbury in the NZSEE journal (Probabilistic Seismic Hazard Analysis of Peak Ground Acceleration for Major Regional New Zealand Locations) shows that major changes in some areas are likely.

Bradley’s research showed that, for 24 locations across New Zealand, expected mean earthquakes magnitudes and peak ground accelerations were generally higher than current Building Code requirements under NZS1170.5. While some areas were unaffected, in others, such as Wellington, Gisborne and Napier, the differences were significant. Peak ground accelerations for Wellington, for example, were more than 50% higher than is currently assumed under NZS1170.5. As a result, changes to the Code and effective downgrades to buildings could be significant; some buildings may effectively fall below the 67% or 80% NBS thresholds often seen by tenants as red lines.

While specific changes are yet to be confirmed, we can make some predictions:

• What is the rating? As the last few years have shown, seismic risk is a key concern for tenants in higher risk areas. The Wellington market, in particular, is affected on an almost weekly basis by assessments based on revised seismic assessment guidelines introduced in 2017-18.  Tenants and owners will want to know where their buildings sit against revised standards, whether or not this is supported by seismic assessment guidelines.
• Is vacating an option? To date, tenants have been prepared to vacate when buildings have fallen short. However, with a rising standard, it may be different. If all existing buildings are effectively not as safe as we thought, tenants may be more likely to shrug their shoulders and stay. Downgrades across the market may also constrain relocation options.
• Knowing the risk is key. Due diligence on acquisitions and new leases will remain be critical and a “flight to quality” will continue. Expert advice is also key – having a lawyer (and often an engineer) who can navigate and explain the complexity is important.
• Legal provisions will be in the spotlight. Rights for tenants to abate rent, vacate and even terminate leases due to low NBS ratings have become the norm. Whether or not these rights are effective – if tenants want to exercise them – will be tested.
• Experts and government have a role to play. The market has adapted relatively quickly to seismic issues, but understanding of risk still has a way to go.  Engineers have more work to do to educate the market on the appropriateness and limits of NBS as a proxy for safety. Equally, government needs to ensure that a transparent and effective measure, reflecting the public’s desire for reliable consistent ratings of buildings, is available.
• Higher standards and more upgrades? Some existing buildings have reached the economic and technical limits of upgrade capacity, but demand will mean that building strengthening projects continue. Anecdotally, some agencies have already begun insisting on increased design assumptions to take account of the anticipated building code changes.

The updated National Seismic Hazard Model is due to be released in August/September 2022.  Brace for impact.

June 2022

Construction supply chain woes continue, EBOSS reports

The demand for construction materials has escalated drastically over the last 12 months and forecasts from EBOSS suggest that it will only continue to rise until Q3 2022 at the very least. Couple this with a constrained supply chain as a flow-on effect from the pandemic and you have the recipe for continual increases to prices and lead times of construction materials.

Starting with the supply issue, the problem largely stems from the New Zealand industry’s reliance on freight. The report found that 90% of all construction product sold in New Zealand is either imported or contains imported components. This dependence on imports was never an issue until the market experienced rapid change over the last year. New Zealand is currently experiencing a significant increase in its construction workload (which include the measures taken to address the housing crisis). Globally, other countries are having the same idea. The United States is experiencing a 15-year housing boom, and both China and India are anticipating construction demand to grow at least 12%. New Zealand is struggling to get access to both materials and freight in the face of this. In fact, EBOSS’ survey found that four out of five domestic suppliers are experiencing issues relating to either:

• increased freight costs;
• access to worldwide shipping;
• the lead times for freight getting out of ports;
• delays at NZ ports; or
• freight availability.

These problems are being aggravated by the domestic demand for materials – building consents issued hit an all-time high in the year to July 2021 in New Zealand, eclipsing the previous record set way back in 1974.
 
Given that supply issues are looking like they’re here to stay, parties considering a development project should:

• plan ahead and discuss areas where delays or additional costs can be expected (and ensure these are factored into project budgets and programmes);
• consider mitigation measures available;
• consider whether fixed prices are the best option for the project; and
• consider the financial health of each party and ability of each to continue to perform their obligations if either party takes the risk on cost escalation throughout the life of a project (including insolvency risk).

You can read the full report here.

Green Star compliance required for Government builds from 2022

In pursuit of its plan for a carbon neutral public sector by 2025, the Government is rolling out a standard which will ensure new buildings over a certain value meet a minimum Green Star rating of five.

From 1 April 2022 this standard will apply to all non-residential government buildings with a capital value over $25m and from 21 April 2023 the standard will apply to all non-residential government buildings with a capital value over $9m.

The Green Star standard evaluates the environmental attributes and performance of a building using a suite of rating tools developed to be applicable to each industry sector. For a five-star rating (or higher), a building must score at least 60 out of a possible 100 points. The system is administered by the NZ Green Building Council and has been adapted to apply to a New Zealand context.

Case Law

Misrepresentation, implied terms: Davies v Smith [2021] NZHC 2865

In 2014 the Davies entered into a contract with Mr Smith in his capacity as director of KM Smith Builder Limited (KM Smith) to build a house on a property owned by the Davies. The Davies claimed that Mr Smith made representations regarding his ability to manage the project, the cost of the project, and the date of completion which induced them to enter into the contract. The Davies further claimed that the contract contained the following implied terms:

1. The cost estimate was between $2.5 and $2.8m;
2. Mr Smith would ensure costs would be reasonable and in accordance with the contract; and
3. KM Smith would ensure the subcontractor costs were reasonable.

In response to the misrepresentation claims, the Court found that Mr Smith had sufficiently outlined KM Smith’s general modus operandi to the Davies in respect of project management and performing work on a cost reimbursement basis. On the date of completion, Doogue J found that, while Mr Smith did provide an indicative date, he qualified that indication heavily so as to fall short of a misrepresentation.
 
As a result of this finding, the alleged implied terms based on these alleged representations could not be read into the contract. However, the Judge addressed the Davies’ submissions all the same.
 
An implied term as to the price would clearly and unequivocally change the entire nature of the contract which was on a cost reimbursement basis and therefore could not be read in.
 
The parties were not in dispute about the existence of an implied term that the cost of construction would be reasonable, but the Court found that the Davies failed to establish that the cost expended was not reasonable.
 
On the subcontractor issue, Doogue J stated that while KM Smith has a contractual duty to keep subcontractor costs to a reasonable level, the Davies were unable to point to any loss occasioned by KM Smith’s failure to seek competitive quotes.

Waivers, estoppel: Valmont Interiors Pty Ltd v Giorgio Armani Australia Pty Ltd (No 2) [2021] NSWCA 93

This recent decision by the New South Wales Court of Appeal (NSWCA) highlights the risk of informal arrangements made to keep projects moving being seen as contractual waivers without express communication otherwise.

Valmont Interiors (Valmont) was engaged by Giorgio Armani (Armani) for construction and fit-out works of a store at the Sydney Kingsford Smith Airport under a construction contract (Contract).  Joinery work was to be provided by a separate contractor however, when it became clear that it would not be ready in time, Armani instead directed Valmont to supply the remaining joinery items.  Valmont completed the work and sought payment.
 
Armani refused to pay Valmont for the joinery items on the basis that Valmont had failed to notify Armani of the variation in accordance with the time bar in the Contract.
 
In the District Court Armani was estopped from relying on the time bar in the Contract because of its own failure to follow the variation procedure when approving and paying for variations.  The judge held that the estoppel only applied to work performed up to the date of the email in which Armani made it clear to Valmont that it would rely on the variation procedure going forward.  This decision was to Valmont’s detriment as most costs had been incurred after the date of the email and Valmont appealed.
 
On appeal, the NSWCA held that the estoppel had effect both before and after the email.  Armani’s email did not displace the assumption that Valmont would be compensated for the cost of supplying the joinery.  Further, Armani’s statement that “there are not variations” suggested that the direction to supply joinery was not a variation, but rather an extra-contractual request by Armani.  In the circumstances, the NSWCA found it was unconscionable for Armani to resist payment for the joinery.
 
This case demonstrates the need for contracting parties to take particular care to familiarise themselves and comply with variation procedures.  Informal arrangements made to expedite projects need to be clearly expressed as a one-off if there is a risk they can be viewed as a waiver.  Finally, if you believe another party is acting on the false assumption that a waiver exists, the onus is on you correct this assumption.

Please contact our Construction team for more information.

March 2022

This article does not provide legal advice. If you would like advice about anything referred to above, please contact a member of our construction law team directly.

Key changes to the PLAWhilst the Epidemic Preparedness (COVID-19) Notice 2020 (Epidemic Notice) is in force, a “no access in an emergency” clause will apply to leases and licences that do not include a similar clause that covers an epidemic.

The PLA now implies a “no access in an emergency” clause into any lease or licence that does not contain a similar clause, and which is in operation during the period from 18 August 2021 until the Epidemic Notice expires (currently mid-December 2021, subject to ongoing three-monthly renewals). If a “no access in an emergency” clause is implied, it will be triggered if:  

• the tenant at any time “is unable to gain access to all or any part of the leased premises to conduct fully their operations from all or any part of the leased premises, because of reasons of health or safety related to the epidemic” (No Access Period); and
• the parties have not already agreed a rent and outgoings abatement prior to 18 August 2021. However, to the extent that any agreed abatement does not apply for the full No Access Period, the Act will apply in respect of the period not covered by the abatement.

New leases (but not existing leases) can contract out of the “no access in an emergency” clause – but this is contingent on appropriate wording being included in the lease. 

If the “no access in an emergency” clause applies and is triggered, the tenant will be entitled to an abatement of a “fair proportion” of rent and outgoings.

The abatement will apply to a “fair proportion” of rent and outgoings during any No Access Period that occurs following 18 August 2021. Whilst “fair proportion” is not defined in the PLA (and must be agreed by the parties), the PLA requires the parties to consider any loss of income experienced by the tenant during the No Access Period when determining a “fair proportion”.

We note that:

• there is likely to be dispute as to which factors should to be taken into account by the parties when agreeing the fair proportion (apart from the mandatory requirement to consider the loss of the tenant’s income during the No Access Period);
• by referring only to the loss of the tenant’s income during the No Access Period, there is an argument that the PLA is directing the parties to disregard any subsequent increase in income (which may have the effect of off-setting the tenant’s loss) following the end of the No Access Period; and  
• generally speaking, when determining a “fair proportion”, it is currently understood (but by no means settled by the Courts) that the parties should consider a range of factors including the remaining term of the lease and rights of termination, COVID-19 related financial assistance, the relative resources of the parties and the actual impact of COVID-19 related restrictions on the tenant’s ability to generate income. The Property Council has recently introduced guidelines in relation to assessing a “fair proportion” which may be of assistance.  

Disputes about a “fair proportion” are to be referred to arbitration under the Arbitration Act 1996.

The PLA requires disputes to be referred to arbitration but does not preclude the parties from agreeing other methods of dispute resolution (for example, mediation or determination by an agreed expert).

Importantly, the PLA includes an obligation on both parties to take all reasonable steps to respond to abatement-related communications within 10 working days. Both landlords and tenants need to abide by these timeframes.

Until the landlord and tenant agree the “fair proportion”, a landlord cannot terminate the lease for non-payment of rent and outgoings. 

This is a critical point from a landlord’s perspective. Although this is onerous, we note that section 246 of the PLA has not been amended. This means that a landlord can still cancel a lease for breach of other, non-rent related lease covenants.

Is a tenant entitled to an abatement?

Does the lease already contain a similar “no access in an emergency” clause?

ADLS leases from 2012 onwards generally include a “no access in an emergency” clause, and are therefore unlikely to be affected by these provisions. The wording of the “no access in an emergency” provision in the PLA is close to, but not the same as, the wording used in clause 27.5 of the ADLS lease. However, we understand the legislative intention to be that if there is a clause in a lease that operates akin to clause 27.5 of the ADLS lease, the PLA provisions will not apply.

The implied clause could apply to Property Council leases. The equivalent clause (clause 7.5(c)) of the Property Council office lease differs from clause 27.5 of the ADLS lease, as the concept of “no access in an emergency” has different triggers. The landlord must also be able to collect loss of rent insurance in order for the tenant to be entitled to an abatement.

Bespoke leases (or modified forms of the ADLS/Property Council leases) will require assessment on a case by case basis. Regardless of the form of lease, we recommend that you take legal advice in relation to any specific lease provisions that may be under consideration.

Has an abatement already been agreed?

As noted above, the “no access in an emergency” clause will not be triggered where the parties have already agreed to an abatement prior to 18 August 2021 (provided that the abatement covers the entire “no access” period).

Can the Tenant “conduct fully” its operations?

What “conduct fully” means is not specified in the Act, but we think it will generally be interpreted to mean that business is able to be conducted at least very substantially, if not fully. It may cover situations where the tenant is operating from the premises sub-optimally, for example as a result of restrictions on capacity or customer access, or due to social distancing requirements. Much will depend on the specific circumstances, the nature of the tenant’s business, the premises and the terms of the lease.

Seek legal advice

Given these changes, we strongly recommend that landlords do not agree any abatement, rely on any form of security to recover unpaid rent and outgoings, or act to terminate leases for non-payment of rent and outgoings, without first seeking expert advice.

If you would like any further information about the effect of the changes to the PLA or how to deal with them, please contact any of our experienced property lawyers.

December 2021

We specifically focus on construction contracts but our comments apply equally to a range of professional services contracts in which fitness for purpose is often sought to be implied.

What is a “fitness for purpose” warranty?

A fitness for purpose warranty is a contractual or implied warranty given by a contractor, consultant or supplier to deliver a product (or a building or service) that is capable of being used in the way that the principal intends to use it. The warranty is included as the principal is reliant on the contractor’s particular skill and expertise to design, build and/or supply a product or service that will perform as required. 
 
A contractor/consultant has a separate duty at common law to exercise a duty of care in accordance with professional standards, and may be liable for breach if it is proven not to have met that level of care (subject to relevant common law tests). In comparison, breach of a fitness for purpose warranty only requires evidence that the product (or building) does not meet a certain standard that the principal has made clear is required (or sometimes which can reasonably be inferred from the principal’s requirements). This lower threshold makes fitness for purpose warranties far more onerous for the contractor and very often will have adverse insurance repercussions.
 
A fitness for purpose warranty may be:

• created by an express contractual provision;
• implied by statute, such as under section 362I of the Building Act 2004 (in relation to household units) and under section 8 of the Consumer Guarantees Act 1993 (in relation to goods supplied to consumers); or
• in some circumstances, implied into a contract by common law.

Implied fitness for purpose warranty

Generally, a fitness for purpose warranty may be implied by common law into a construction contract if the contractor has some level of input and control over the design of the final product. In this scenario, the principal is reliant on the contractor’s knowledge and skill to ensure the product is suitable for the stated or implied purpose. If a contractor is merely following designs prepared by another party, the contractor will not have sufficient control over the design and there is therefore limited scope for such a warranty to be implied by common law.
 
For any term, including a fitness for purpose term, to be implied into a contract, the test in BP Refinery (Westernport) v Hastings Shire Council, must be met. The implied term must:

• be reasonable and equitable;
• be necessary to give business efficacy to the contract;
• be so obvious that it goes without saying;
• be capable of clear expression; and
• not contradict an express term.

In Greaves v Baynham Meikle, a contractor engaged to construct a warehouse to be used, in part, for the storage of oil drums on the first floor under a design and construct contract was sued after the first floor cracked, necessitating expensive remedial works. The English Court of Appeal found that the purpose for which the warehouse was required (including that oil drums would be stored on the first floor) was made known to the contractor and became the “common intention of the parties”. Therefore, an implied warranty existed that the design would be fit for such purpose. In this case, the design, for which the contractor was responsible, was inadequate and constituted a breach of such warranty. Through the same failure, the contractor was also held to be in breach of the duty to use reasonable care and skill imposed by law, showing that the two duties will overlap.
 
In IBA v EMI Electronics Limited and BICC Construction Limited, a broadcasting authority sought specific assurances from the contractor that a television mast would meet specifications and would not break, the broadcasting authority having experienced problems previously. The contractor assured the broadcasting authority that the mast would be suitable and no tests would be needed. The mast subsequently failed and the Court found it “could see no reason why” a contractor who contracts to design, supply and erect a mast (and by analogy other projects) would not be “under an obligation to ensure it is reasonably fit for the purpose for which he knows it is intended to be used”.
 
What does this mean for consultants? In Global Switch (Property) Singapore Ltd v Arup Singapore Pte Ltd, the Singapore High Court dismissed a US$17.5m claim brought by Global Switch against Arup Singapore, over alleged failures of duty that led to a data centre outage. Global Switch claimed that it was Arup’s responsibility to design a chilled water system to cool the data centre in a way that reflected the needs of Global Switch. The Court found no implied fitness for purpose because the high threshold for implying a term was not met and the contractual documents were not clear as to the standard of design or purpose that was required. The absence of sufficient clarity meant an implied term “was too vague and ambiguous to succeed”, and was not required for business efficacy. Other relevant considerations included that Arup was already under a contractual duty to use reasonable care and skill in performing its obligations and likely would not have accepted an additional (unnecessary) fitness for purpose term.

This case should not be taken as a carte blanche rejection of fitness for purpose warranties in consultancy agreements – each case should and will be considered on its particular circumstances. It does, however, indicate that in principle, providers of professional advisory services will generally be under an obligation to use reasonable care and skill, but are not responsible for providing a perfect result unless that has been expressly provided for. In other words, fitness for purpose warranties will not always be readily implied.
 
Insurance repercussions

It is important for contractors (especially in construct-only contracts with limited temporary design) and consultants to identify if they have unwittingly taken on a fitness for purpose warranty. Depending on the level of professional indemnity cover the party holds, it may only respond where a claim arises from professional negligence and the policy may be invalidated altogether. Contractors, especially design and build contractors, should err on the side of caution and assume they are taking on a fitness for purpose obligation when carrying out design work. While some overseas design and build contracts (i.e. JCT and ICE) expressly exclude fitness for purpose obligations, the New Zealand Standards suite does not.
 
Finally, a couple of tips for those design and construct contractors or consultants that may accept a fitness for purpose warranty (under NZS 3916 construction contract or possibly on an Australian project where fitness for purpose is more reflective of market practice):

• check the interaction with your professional indemnity insurance; and
• limit the express fitness for purpose warranty to a measurable standard against which you can design and construct.

Our experienced construction law team can assist with any queries regarding the matters raised in this article.

November 2021

Under sections 245 and 246 of the Property Law Act 2007, a landlord can cancel a lease after serving notice on a tenant for non-payment of the rent or a breach of other obligations under a lease (such as the obligation to pay outgoings). The recent High Court case of SHK Trustee Company Limited v NZDMG Limited serves as a warning to landlords who intend to cancel a lease for non-payment of rent and outgoings during an emergency.
 
The landlord leased an office and a warehouse space to a kitchen manufacturer under two separate leases. The leases were on the widely-used Auckland District Law Society (ADLS) deed of lease, which includes a “no access in emergency” provision at clause 27.5. The tenant ceased rental payments from the first day of the first alert level 4 lockdown on 26 March 2020 and claimed a rent abatement under the “no access” clauses in the leases.
 
In August 2020, the landowner served a notice on the tenant informing the tenant that it was in default of its obligation to pay the rent and outgoings and requiring that the outstanding sums be paid within 30 working days. The notice made no allowance for the required abatement of rent and outgoings due to the “no access in emergency” clauses. After the tenant did not comply with the notice, the landlord cancelled the leases, took possession of the premises and later commenced summary judgment proceedings to recover the rent arrears.
 
The High Court declined the landlord’s application in respect of the amounts claimed as the landlord had failed to provide for an abatement of the rent in light of the ongoing pandemic.
 
As this was a summary judgment application for unpaid rent, the Court was not able to assess what the “fair proportion” abatement should have been (as this is “an evaluative exercise that cannot be done on a summary judgment application”) or determine whether the landlord’s breach notice was invalid. If the breach notice was invalid, the cancellation of the leases would have been unlawful. The Court stated that it was arguable that the breach notice was invalid on the basis that it did not make an allowance for the required abatement of rent and outgoings under clause 27.5 of the leases. The Court recommended that the landlord ought to have obtained an authoritative determination of the rent payable by suing the tenant and obtaining a formal judgment of the unpaid rent, or to have only served the breach notice for the undisputed rent arrears.

The case is an illustration of the risks involved in serving breach notices. Where claimed rent arrears relate to a period during which the rent abates under the terms of the lease or due to a statutory entitlement, landlords must draft breach notices with caution. Landlords might choose to rely on outstanding rent or outgoings payable in respect of non-abatement periods, agree the abated “fair proportion” with tenants or obtain judgment through legal proceedings as to the amount owing under the lease during the abatement period. Landlords also need to consider statutory interventions due to the COVID-19 pandemic (such as the COVID-19 Response (Management Measures) Legislation Bill) – relying on the words of the deed of lease alone may not be sufficient.

October 2021

The Covid Bill amends several pieces of legislation. In this note, we focus only on the proposed amendments to the Property Law Act 2007 (PLA).

This is the second attempt at implying rent abatement provisions into commercial leases since Minister Little’s proposals in 2020, which did not make it beyond a Cabinet paper.

The Bill has received criticism both within and outside of Parliament for cutting across existing commercial leasing contracts, and the press release by the Government announcing the Covid Bill did not indicate the extent to which a lack of rent abatements is a problem in commercial leases.

The Property Council and a number of significant figures in the property industry have come out in opposition, noting the issues around defining the quantum of a rent abatement. Interestingly, the Property Council is seeking to gather information from its members about abatements or deferrals already agreed. The results may be a useful indicator as to whether there is a widespread problem necessitating Government intervention, or otherwise.

Key proposed changes to the PLA

• From 28 September 2021 a “no access in an emergency clause” (implied clause) is implied into leases that do not include such a clause that covers an epidemic: Unamended ADLS leases from 2012 onwards already contain a similar clause and will not be affected by the proposed legislation, but other forms of leases such as Property Council leases and bespoke leases will need to be considered on a case by case basis.
• The implied clause is triggered when a tenant “is unable to gain access to all or any part of the leased premises to conduct fully their operations from all or any part of the leased premises, because of reasons of health or safety related to the epidemic”:  What “fully” conduct means is to be determined and may cover situations where the tenant is operating in the premises sub-optimally, such as restrictions to capacity, customer access or social distancing requirements.
• The implied clause provides that a fair proportion of rent and outgoings will abate under the lease during the period of the tenant’s inability to access all or part of the leased premises, backdated to 28 September 2021 (but possibly earlier), and ending when the inability ceases:  A “fair proportion” is not defined and nor is there any guidance on this. Much will depend on the circumstances, and negotiated outcomes will vary depending on the nature of the tenant’s business, the premises and the terms of the lease.  The provisions around when the abatement commences are unclear.  We expect these will be further developed in Select Committee.
• The implied clause will not apply where the parties have already agreed contractually to vary the rent payable if access to the premises is restricted because of an epidemic (a “pre-commencement rent variation agreement”) and the agreement applies to the period covered by the implied clause: The implied clause might therefore apply for some of the period not covered by the pre-commencement rent variation agreement.
• Until the landlord and tenant determine what a fair proportion is, a landlord cannot terminate a tenant’s lease for non-payment of rent and outgoings:  Section 246 of the PLA has not been amended so, a landlord may still cancel a lease for breach of other covenants of the lease.
• Any dispute about what is a “fair proportion” is to be referred to arbitration under the Arbitration Act 1996. Arbitration could be expensive and lengthy: This does not preclude the parties from agreeing other methods of dispute resolution.
• This rent abatement is specific to the COVID-19 epidemic:  It is expressly repealed when the Epidemic Preparedness (COVID-19) Notice 2020 expires or is revoked.
• The implied covenant may be negatived, varied or extended by express agreement after 28 September 2021:  Relying on clauses in existing leases which exclude implied terms in the PLA will not be sufficient to exclude this implied covenant.

What can a landlord or tenant do? 

Until the Covid Bill achieves Royal assent, landlords are not legally obliged to offer a rent or outgoings abatement where they do not have clause 27.5 of the ADLS lease (or a similar clause) in their leases. This is obviously a hard-nosed approach to be taken by landlords, but not an illegal one. Though the Covid Bill is only proposed legislation, tenants have been given a certain level of bargaining power to start discussions to achieve a rent and outgoings abatement and landlords can expect to see an increase in requests of this nature. Similar requests occurred shortly after Minister Little’s announcement in 2020. Regardless of the passing of the Covid Bill, landlords and tenants are still free to come to agreement on a rent and outgoings abatement. Provided they agree from 28 September 2021, this will exclude the implied rent relief provisions in the Covid Bill entirely, perhaps in return for some other consideration. One particular incentive for the parties to agree an abatement is the lack of guidance over “fair proportion”. It is our experience that parties often pre-agree fixed discounts that will apply for Alert Levels 3 and 4. We strongly recommend that landlords do not take any action to terminate leases for non-payment of rent and outgoings without seeking advice first. Particular caution should also be exercised as to whether a landlord calls on a bank guarantee or other security in respect of rent and outgoings, which may later be found to be properly subject to abatement from 28 September 2021. The Courts have regularly made decisions favourable to tenants, where landlords have acted aggressively in uncertain situations.

What leases are intended to be caught? 

Leases which already contain a “no access in an emergency clause” are excluded from rent abatement provisions in the Bill. The proposed wording of the “no access in an emergency” provision is close to, but not the same as, the wording used in clause 27.5 of the ADLS lease. However, by way of example, the equivalent clause 7.5(c) of the Property Council office lease is less clear in that:

• the concept of “no access in an emergency” has slightly different triggers (such as the narrower concept of “inaccessibility”); and
• there is also an additional requirement before a tenant may obtain rent relief, being that the landlord must be able to collect loss of rent insurance.

Is clause 7.5(c) of the Property Council office lease a “no access in an emergency clause” for the purposes of the Covid Bill? It is questionable and will likely be the subject of legal debate. However, the overall intention appears to be that, if there is a clause in a lease that operates akin to clause 27.5 of the ADLS lease, the implied clause proposed pursuant to the Covid Bill will not apply.

Watch this space 

The Covid Bill is proceeding quickly through the Select Committee process and we can expect some strong submissions and public comments to be made before the Covid Bill is passed.

If you would like any further information about the effect of the PLA changes or how to deal with them, please contact Antonia Shanahan, Steve Woodfield, Mark Hay, Simon Mee or any of our experienced property lawyers. 

October 2021

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.

The Bill is currently with the Select Committee, their report being due 11 November 2021.

New legislation addresses inefficiencies in modular consenting

The current consenting process as it relates to modular construction requires a separate consent for each component produced. If a component is produced in a different council region to where it is delivered for assembly, then consent is required from both councils.

The Building (Building Products and Methods, Modular Components, and Other Matters) Amendment Act 2021 (Act), aside from having a catchy name, recently received royal assent and seeks to address these issues.

The Act establishes a new scheme for certification, registration and monitoring of modular component manufacturers (MCMs). MCMs will be able to obtain certification to manufacture a modular component from a registered certification board. Certification then enables that MCM to produce the modular component without the need for inspection each time a component is produced.

Under the Act, building consents will only be required for the installation phase, with processing times reducing to 10 working days (down from 20 working days).

The Act is effectively a framework and MBIE is currently consulting with the industry regarding necessary regulations to support and implement the Act.  The Act and the supporting regulations will come into effect no later than 15 months from the date of royal assent of the Act (so September 2022).

The hope and expectation is that this removes a barrier preventing the uptake of modular construction in New Zealand and that housing supply can be speed up as a result.

Proposed regulation of the engineering profession

The Ministry of Business, Innovation and Employment (MBIE) recently opened consultation on options to increase regulation on engineers in light of reports following the CTV building collapse and contamination of Havelock North’s drinking water.

The broad concern is that membership of CPEng and Engineering New Zealand is currently voluntary and any engineer wanting to avoid competence checks or disciplinary processes can simply opt out from these private entities. This places the burden on consumers to determine engineers’ competence.

MBIE have developed three proposals:

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.

Submissions have now closed and a cabinet paper has been submitted to the Cabinet Economic Development Committee for discussion.

Case Law

Contract interpretation: Bathurst Resource Ltd v L&M Coal Holdings Ltd [2021] NZSC 85

The Supreme Court has unanimously confirmed that, in principle, both pre-contractual negotiations and subsequent conduct can be admissible evidence when interpreting a contract.

As a check on this, the Court clarified that relevance and probative value are yardsticks for the admissibility of such evidence, which must be examined in accordance with the Evidence Act 2006.

Primacy remains in the written words when interpreting a contract, however ancillary conduct may assist courts in determining a contract’s objective meaning to a reasonable person having all background knowledge available to the parties. For prior negotiations, the conduct must be mutual; one party’s subjective belief as to the meaning of the words which isn’t communicated to the other party is inadmissible. Conversely, subsequent conduct need not necessarily be mutual, however it must demonstrate evidence of the parties’ objective intention as to the meaning of the contract at execution.

Contract, set-off: Asphalt Supply Company Limited v Cole John Limited [2021] NZHC 1257

Cole John (Principal) engaged Complete Limited (Contractor) to undertake construction work on the Principal’s property. The Contractor subcontracted the asphalt works to Asphalt Supply (Subcontractor) who provided the Contractor with a written warranty in favour of the Principal upon completion.

The Contractor said that the asphalt work was defective and withheld payment to the Subcontractor totalling $80,040 (Balance). The Subcontractor sued the Principal for the Balance, the Contractor having gone into liquidation. The Principal counterclaimed for breach of warranty. 

The Subcontractor, acknowledging it had no contract with the Principal, discontinued its claim. The Principal’s counterclaim went to trial in the district court. One of the key issues was whether the Subcontractor could set off Balance against the Principal’s counterclaim for damages (under s 18(2) of the Contract and Commercial Law Act 2017 (CCLA)).

The District Court held that the Subcontractor was not entitled to set off the Balance against the Principal’s counterclaim for damages (on the basis that the Balance was due on completion and that the Subcontractor had not completed the works).

On appeal Campbell J allowed the Subcontractor to set-off the Balance for breach of warranty against the claim for damages, overturning the District Court Judge’s ruling that the Balance was only due on completion, and the Subcontractor had not completed the works. 

The basis for the decision was that s 18 (2) of CCLA enables a party in the Subcontractor’s position (i.e. conferring rights in respect of a contract to a third party) to set-off (amongst other defences) any claim it has against the party to the underlying contract against any claim brought by the third party beneficiary (i.e. the Principal). 

The High Court held that the normal measure of damages available to a Principal for incomplete or defective work under a construction contract is the cost of completing the work or remedying the defects, less any sum that would have been payable to the contractor had the work been properly carried out.

Accordingly, they allowed the Subcontractor to set off the Balance to reduce the damages award payable.

Please contact our Construction team for more information.

August 2021

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