The Insurance Council is of the view that Christchurch’s policy is unlawful and invalid. This has obvious ramifications for owners and insurers in Christchurch. Repairs are apparently being delayed pending clarification of the level of seismic strengthening required legally. If an insurer is obliged to repair to 67% of the code that will likely cost a building owner or insurer more than simply repairing to meet the building’s existing standard.

It’s possible that others might join as a party to these legal proceedings to make submissions on these issues. This might include other territorial authorities, individual building owners, other insurers or engineering professionals. The Insurance Council is pushing for the judicial review to be heard as soon as possible.

Auckland Council’s Earthquake Prone, Dangerous and Insanitary Building’s Policy was adopted in November 2011 and is to be reviewed within 5 years, perhaps earlier depending upon the recommendations of the Canterbury Earthquake Royal Commission or any legislative changes.

The earthquake prone section of the policy applies to commercial buildings or residential buildings of 2 stories or more that contain 3 or more household units. So most of the traditional residential housing stock is currently excluded. Auckland’s policy requires all these buildings included within the policy to be brought up to 34% of the current national building standard over time and encourages higher levels where possible. Council is currently adopting a staged approach to the identification of earthquake prone buildings. Work is being completed in assessing priority buildings and property owners will have 10 – 30 years to carry out seismic strengthening once identified as earthquake prone.

Building owners in Auckland and other centres will be interested to see the result of the Insurance Council’s application for judicial review. Earthquake strengthening costs are potentially a huge expense facing the industry, and if a Council’s policy can be challenged legally as going too far or too fast that has ramifications for all.

2 Free Chapters from our Facebook for Business eBook! Click here for instant download

The webinar will be of interest to those involved with management rights – primarily developers, current managers or possible purchasers of management rights. We will talk about:

• the Unit Titles Act 2010 s139 and s140
• duties of care on developers
• recent Court cases (including the decision at The Sentinel and Atrium Management)
• whether there remains such as thing as exclusive letting or other rights
• risks to managers and developers
• what new management rights can you create
• what pressure is being brought to bear on current holders of management rights
• experiences in Queensland, Australia
• the upcoming review of the Unit Titles Act 2010

E-mail rachael@alexanderdorrington.co.nz to register for this and regular updates from our newsletter “The Property Developer”. There is no charge for our webinars or newsletters.

If you have a particular question you want added in, just e-mail that too and we will see what we can do. Obviously we can’t provide legal advice without the full facts or information so questions should be general in nature.

This is the first of our “Property Developer’s Webinar Series” that we announced at the Property Council, Residential Property Development Conference on 24 October 2012. if you registered at the conference we have your details already. The other webinars (“Update on Securities Act exemptions and compliance issues”, “Boundary adjustments, Redevelopments and Turnover Disclosure under the Unit Titles Act 2010″, “Keeping your Pre-sales”) will commence from early 2013. We also have in mind some for those doing smaller scale subdivisions – “Subdivision Tips and Traps” and “Ensuring a well-managed development”. If you wish to pre-register for those please e-mail Rochelle as well.

It’s really easy to attend a webinar. All you need is a computer, an internet connection and a phone. You can participate from your own desk and even comment or ask the presenter questions during it.

2 Free Chapters from our Facebook for Business eBook! Click here for instant download

The review is only intended to address minor and technical issues with the Act. A fuller review is expected to commence after October 2013. It is postponed so that proper empirical data can be collected given the law is still fairly new.

Some of the more interesting amendments are as follows:

1. Dealing with some anomalies where principal units are subdivided. This includes removing the requirement for a principal unit to have its ownership interest reassessed for subdividing because of the difficulties in carrying out this valuation without there being consideration of the value of all of the other units.
2. Reducing the 36 month minimum period between reassessment of utility interest and ownership interest to 6 months.
3. Tidying up boundary adjustments so that it is clear that boundary adjustments are only allowed where the boundaries of the common property are left unchanged.
4. Removing the requirement for a unit owner to obtain the consent of their mortgagee before voting in a general meeting, recognizing that this is a contractual issue for owners to manage and not something that should call into question the validity of decisions made.
5. Clarifying that a unit owners contribution to ground rental should be paid in proportion to the utility interest. (Confusion is created by the current act which on one hand provides that contributions to ground rental are levied in proportion to ownership interest and then on the other hand states that they are paid out of the operating account, which is levied by utility interest.)
6. Clarifying what is a free standing unit for the purpose of insurance so that it is clear that a principal unit and adjacent accessory unit that is otherwise free standing could be insured separately from another similar unit.
7. Dealing with some of the disclosure issues. For example, dealing with short settlements, reducing the time-frame for notices and removing the 10 days’ notice where a buyer cancels for the failure to provide the pre-settlement disclosure statement or additional disclosure statement.
8. Allowing an officer or employee to be put forward for the roles of chairperson and committee members where units are owned by companies.

We will be preparing a submission so if anyone has any comments on these issues or any of the other issues raised please do not hesitate to let us know.

2 Free Chapters from our Facebook for Business eBook! Click here for instant download

Council has tried to strike out Swordfish’s statement of claim. Swordfish say council breached a duty to take all reasonable care in issuing its section 224(c) and consent notices. The problem arose on a staged subdivision consent. Stage 1 was completed. A section 224(c) certificate for stage 1 issued and a consent notice was registered against the titles. Unfortunately reading all of those together it appeared that the earth fill and flood protection conditions for stage 2 and 3 had also been complied with, which was not the case. Swordfish purchased the land under that misapprehension and now has to spend more preparing the land for subdivision. They consider Council should compensate them as they got it wrong.

The High Court has not struck out the claim, which was what Council wanted. But it’s not the case that a new duty of care is automatically established. Rather, a Council will need to consider the possibility of such a duty, breach of which would give rise to a damages claim, whilst the parties determine what to do next.

Inevitably one expects Council’s to take even more care in drafting of their resource consent conditions and consent notices. More care may mean more time and more money for developers to pay. One of the High Court judges noted that in the building context Council’s risk is managed by employing building inspectors or assessors to make the assessments for them and that the cost of so doing can then be passed on to applicants. They suggested something similar could be considered here.

It goes without saying that purchasers of property should still take all proper care doing their due diligence, especially if a staged subdivision consent applies or if the consent notice indicates there remains conditions to be complied with. If the LIM and other documentation is not clear, direct inquiries should be made of Council.

2 Free Chapters from our Facebook for Business eBook! Click here for instant download

First, it is clear that it is still possible to establish an enduring proxy, for example unit owners appointing a manager or lessee on an enduring basis, rather than having to do this at each annual meeting. The grant of a power of attorney and appointment of the manager, Theta, as the owner’s representative pursuant to section 96(2) of the Unit Titles Act was included in a variation of each unit’s lease. Theta then used the power of attorney to appoint a proxy at the AGM. The Judge held votes cast by that proxy counted. Lihua was endeavouring to ensure votes by the proxies did not count and wanted a prohibition on future voting using these proxies.

Secondly, an owner can require the body corporate to deliver to them the register of unit owners, containing the information set out in regulation 4(1). The list of information is extensive and includes the name, contact details and method of contact for the owners. That will include for the directors and trustees where a company or trust is the owner.

It is clear in the regulations that the register of unit owners can be searched by a person approved by the body corporate or the body corporate committee. A proper request needs to be made under Regulation 4. What this case seems to decide is that it will be difficult for the body corporate to refuse such a request from an owner. The Judge also states the power to search was not limited to the right to inspect the register. The right to search also includes the right to take copies of the register.

Lihua wanted the register to communicate with other owners. The body corporate was concerned as to the type of information that might be circulated to owners. The court suggested a practical approach – that the proposed communication Lihua wanted to send be made available to the body corporate 10 days before it is sent to unit owners, to enable the body corporate to explain to unit owners that it has provided the contact details as required, and to present its own views.

Caution will be needed by body corporates dealing with these requests given the Judge’s comments. It would seem that a body corporate should not unnecessarily withhold its approval of any request by an owner to search the register. The body corporate’s actions can be reviewed to check their reasonableness.

Thirdly, the notice of annual general meeting whilst requiring financial statements to be attached does not require audited financial statements. This is because the body corporate has a choice as to how the auditing requirements are approached. Lihua wanted to try and show that the AGM that had been held was invalid, which was why they challenged whether the notice of AGM included the proper financial statements.

Fourthly, the Act does not allow an independent chairperson to run the AGM. This is what we all expected. Lihua wanted the Court to order that there be a further AGM under independent chairperson.

Fifthly, there were some comments about what were the proper rules and procedures through the transitional period between the two Acts. Now that the transitional period has ended those comments are largely historical. They could become relevant if a dispute arose about decisions made during that transitional period e.g. as to the quorum required. Unfortunately there is not a clear decision on what the applicable rules are through the transition as this did not need to be decided. Lihua was arguing it was not a proper meeting as the quorum requirements were not met. Given it had been determined the proxies were valid, this argument failed whether under the new or old regime.

2 Free Chapters from our Facebook for Business eBook! Click here for instant download

Here the building is principally a hotel, with 6 penthouse apartments. Council’s duty was to take reasonable care that buildings were constructed in accordance with the building code. The body corporate and owners now need to prove that the duty of care has been breached by council and that they should be entitled to damages as a result of that breach. That will be where the debate now turns.

What this means is that councils face potentially bigger contingent liabilities. Perhaps bigger fees and bigger rates at Auckland Council as a result and certainly very careful checking of applications for building consent, inspections and signing off on code compliance certificates. In commercial projects Council have tended to rely more on the appointed professional team. This might change now with more scrutiny being applied. It is also possible that those who design and construct commercial buildings will now also owe a duty of care to the ultimate owners, whether the property is residential or commercial.

Having said that this decision technically relates only to council’s duties under the Building Act 1991. There is a 10 year long stop on liability for defective building work so there may not be many claims out there. The relevant sections of the Building Act 1991 came to an end on 31 March 2005. So the window might be relatively small for defective building work claims that can still be made, say building work completed between late 2002 and early 2005; that is unless they are already in the legal system. No doubt those are the kind of assessments councils will currently be having to make.

Whether or not the Building Act 2004 is different and has effectively changed the scope of council’s responsibility remains to be seen too. Some of the judges noted that they would likely come to the same decision under the new Building Act.

For those of us focusing on trying to complete new development this decision may make things harder rather than easier for a time.

2 Free Chapters from our Facebook for Business eBook! Click here for instant download

• The purchaser intending to use the land for making a taxable supply; and
• The purchaser not intending to live on the property.

The system relies on warranties given by the purchaser and by the vendor in the agreement. Each party warrants that the GST information supplied is correct. Some interesting outcomes arise if the warranties are breached.

Scenario 1 – vendor not registered

Let’s say both parties have warranted the CZR rating applies. The price is plus GST. It turns out that the vendor is not GST registered.

The vendor does not need to account to the IRD. The purchaser may be able to claim GST using the second hand goods regime if the price is described as GST inclusive. However, if the price is plus GST no claim can be made.

The purchaser in this position would have been better off to make the price GST inclusive, despite the commonly held view the best practice is to use plus GST.

Scenario 2 – GST payable but warranties breached

What say the price is “plus GST” and the parties have warranted that CZR applies. After settlement it becomes evident the purchaser had breached the warranties given so CZR does not actually apply.

If the price is plus GST the vendor can chase the purchaser for that GST using the terms of the contract, but who must account to the IRD. The vendor would usually but section 5(23) of the Goods and Services Tax Act covers the situation. If compulsory zero rating is intended to apply and it turns out the criteria are not met, the purchaser must pay the GST that the vendor would otherwise have paid. The purchaser is treated as if they were the supplier.

Irrespective of the contract terms, this section of the GST Act imposes an obligation on the purchaser to meet the vendor’s tax liability.

Difficulties can be exacerbated if the agreement provides for a long settlement date but the time of supply is made earlier. Because one party’s taxable position is determined by another’s profile, the risk is difficult to manage. That may be reason enough to the manage the time of supply and kick it out to settlement when the agreement is long term.

The best advice we can give is take specific taxation advice before signing your sale and purchase agreement.

2 Free Chapters from our Facebook for Business eBook! Click here for instant download

In the current economic environment it is common for landlords to provide a prospective tenant with an inducement to encourage the tenant to enter into a lease. This may be in the form of a lump sum cash payment. Under the current income tax provisions, the payment of the cash incentive would normally be tax deductible for the landlord, on the basis the expenditure has occurred in the course of carrying on a business. The incentive is usually non-taxable for the tenant if the payment is received in relation to a lease that relates to the structure of the tenant’s business.

The government is proposing to tax the cash incentives received by the tenant, so that income tax is paid by the tenant. There would be no change to the lessor’s tax liability, as the incentive would remain generally deductible. However the timing of those deductions may also be pushed out.

The proposed tax changes would apply to commercial leases, subleases and licenses, with sales of land, lease backs and residential leases excluded.

Whilst the nuts and bolts of the legislative changes are yet to be ironed out and only draft proposals are out there, these changes are proposed to be retrospective if adopted. Incentives paid on or after 26 July 2012 would be caught. For now it is very much ‘watch this space’. The form or amount of incentives might be negotiated more heavily in the meantime.

By Jourdan Griffin
AlexanderDorrington, Lawyers

2 Free Chapters from our Facebook for Business eBook! Click here for instant download

A cross lease owner gets a composite title. It shows a shared fee simple interest and leasehold interest on one title.

You and the neighbour together own the underlying land and buildings. That ownership is an undivided share. Be warned it might say 50/50 on the title but in actual fact be 70/30 because of the size of the respective buildings and the way exclusive areas have been created.

If you are doing anything relating to the common property – sorting drainage, repairing the shared driveway, weeding the shared garden – then you and the other cross lease neighbours need to be in agreement. That can be hard to achieve sometimes. If agreement cannot be reached Court action or arbitration might be the only option.

Dealings with the buildings and exclusive use areas on the land is governed by the terms of the leases. Each cross-lease owner will have their own separate lease. The owners together are the lessors. The lessee is the individual whose house it is. If a lessee wants to renovate, the cross-lease neighbour’s consent may be needed. The lease might say no pets. It might say you need joint insurance. The clauses about the exclusive use area might be unclear. The leases on the same cross-lease might be the same, or they might be different so that you and the neighbour have different rights and restrictions that apply. It’s like being a tenant in your own house.

There are other possible problems with cross-leases – for example when the underlying land is itself leasehold, registration of easements over composite titles, uncertainty as to fencing, possible mortgage difficulties. Despite this the cross-lease title is widely used and accepted. Just be clear that a cross-lease title is not as good as a fee simple title.

Each time the house is added onto, the plan attached to the title should be updated. It’s the house shown on the plan that is leased. There are many cross-leases where this is not done. Purchaser’s are becoming more wary about this. If a cross-lease owner is considering updating a cross-lease plan that does not properly show the buildings, they should also consider asking for a full subdivision and getting a separate fee simple title, as the cost may not be that different.

2 Free Chapters from our Facebook for Business eBook! Click here for instant download

What follows assumes you are broadly familiar with the current 8th edition. If you are looking at entering into a new agreement for sale and purchase of real estate, whether as vendor or purchaser, it is always best to check with your lawyer first, regardless which edition applies.

FOR ALL TRANSACTIONS:

Building report condition

A standard building report condition is introduced. Purchasers will select whether to include this building report condition. If selected, the purchaser must consider whether the report is satisfactory (being objective). They will have 10 working days. The report must be prepared in good faith by a suitably qualified building inspector in accordance with accepted principles and methods. If the purchaser avoids the agreement (because they are not satisfied with the report) then the vendor can insist they are given a copy. Purchasers may wish to consider writing their own condition, giving them more flexibility.

Vendor warranties

The vendor now warrants that the chattels are delivered to the purchaser in reasonable working order, where applicable, but in all other respects in their state of repair as at the date of the agreement, fair wear and tear accepted. This amendment is problematic. Vendors might want to delete the new wording. Otherwise arguments at settlement around chattels will be common place.

The warranty the vendor gives concerning building work they have done at the property has been slightly narrowed. The warranty that the works were completed in compliance with permits and consents has been narrowed “to the vendor’s knowledge”.

Where compliance schedules are required and the property being sold is part of a building the warranties are also narrowed to those matters within the vendor’s knowledge. However, for unit title property this represents the introduction of a new vendor warranty, that to the vendor’s knowledge there has been full compliance with the requirements of the compliance schedule, there is a current building warrant of fitness and the vendor is not aware of a reason which would prevent a building warrant of fitness from being issued.

Settlement/possession date

There is now just one date, the settlement date. Previously there was a separate possession and settlement date but this is hardly used anymore.

Nominees

Recognition is given to the fact that purchasers commonly use nominees. The description of the purchaser now includes the words “and/or nominee” by default. If a vendor does not want there to be a nomination then these words should be deleted. If there is a nomination the named purchaser remains responsible for the purchaser’s obligations under the agreement.

Insurance/damage

The insurance/damage provisions have been amended, largely driven by Christchurch experiences. Where there is partial damage and the property is not untenantable the purchaser can deduct the cost of reinstatement or repair from the amount they tender on settlement. This will be relevant to damage caused between the contract being signed and the settlement date. We expect a little more discussion around this on settlement, but at least in Auckland this will mostly be about damage caused by the vendor, not new earthquake damage. If there is a dispute about the amount then an interim amount (determined by an experienced property lawyer if not agreed) is deducted on settlement and held in trust until determined or agreed, like other claims for compensation under the contract.

Interest for late settlement

Where an interest rate for late settlement is not selected, the default rate will be the current Inland Revenue Department rate for unpaid tax, plus 5% per annum. This is likely recognition of the fact that interest rates are currently too low to be a true default rate.

Purchaser default

Where the purchaser is in default, then the vendor must now provide reasonable evidence of the vendor’s ability to perform any obligation that they are obliged to perform on the settlement date in order to use its remedies. This may make it more difficult for a vendor to charge penalty interest as previously vendors have just needed to assert they are ready, willing and able to settle, without providing evidence.

Calculating days

The time for performance clause has been clarified further. Where the day nominated for settlement or fulfilment of condition is not a working day, then the relevant date will be the last working day before the day so nominated. Whilst this was clear for the settlement date not so for conditional dates.

Deferral of settlement date

Where there is a right to a deferral of the settlement date more time will now be allowed.

Where neither party is ready willing and able to settle the settlement date will be deferred to the third working day following the date that one gives notice saying that they are ready; previously it was the second working day.

Where a new title is to be issued then the settlement date will be deferred to the tenth working day following the day notice is given that title is available and searchable, previously it was the fifth. This means title must be available by the tenth working day prior to settlement for the vendor to be able to insist on settlement on that date.

Trustee limitation of liability

The limitation of liability for a professional or independent trustee has been slightly narrowed. If the right of the trustee to be indemnified has been lost or impaired then the trustee’s liability will be personal.

Lawyers settlement obligations

The way lawyers settle sales and purchases must now be done in accordance with guidelines issued by the New Zealand Law Society. Remote settlement is required, except in limited circumstances, so bank cheques will hardly be used. Lawyers will need to use SCP (the same day cleared payment system through the Reserve Bank, unless agreed otherwise). For those buying and selling there will not be much change on the face of it, although note that settlement will not happen under the contract now until the paying or receiving bank have also given direct confirmation of payment to the vendor’s lawyer. This could create delays to settlement.

It is also made clear that e-dealing is to be used to transfer title, which is what happens in practice anyway.

Notices

Lawyers may now use a secure web document exchange for serving and receiving notices. This must be agreed to by the lawyers.

Where e-mail is used to serve notices return e-mails generated automatically will not be deemed to be an acknowledgment. The same care should be taken where e-mail is being used for formal notices as these will not be served until acknowledged by the other side orally, by return e-mail or otherwise in writing.

There is however clear recognition that electronic forms of communication are appropriate, subject to the rules regarding service referred to above.?

FOR UNIT TITLES ONLY

Deposit

Where a unit title property is being sold, the deposit will now be held by the stakeholder (usually the agent or vendor’s lawyer) until the purchaser’s rights to cancel the contract under the Unit Titles Act 2010 have been exhausted. This is a welcome change. Purchasers could have a right to cancel where disclosure is not properly completed, but face difficulties in recovering the deposit. However, for vendors of unit title property there is potentially a long wait before they can use the deposit. Committing to another purchase in the meantime could be difficult.

Disclosure

The agreement now clarifies that the pre-settlement disclosure statement is from the vendor, certified correct by the body corporate. Insurance certificates, not policies, must be supplied in addition, not less than 5 working days before settlement.

Levies and apportionments

It is also made clear that levies for the operating account are apportioned on settlement. There will be no apportionment of the contributions made to the long term maintenance fund, contingency fund or capital improvement fund. Vendors should consider the contributions they have made when pricing their units. If there is a large balance sitting in the fund they will not get this back from the body corporate or the purchaser.

Address for service

The requirements for service of notices under the Unit Titles Act were unclear as the new law required service on the individuals not their lawyers. This is addressed with the lawyer appointed “agent” for the purposes of the Unit Titles Act.

Recovering fees

Any fee for the additional disclosure statement paid by the vendor can either be deducted from the deposit or included in the monies payable by the purchaser on settlement. This gives the vendor more protection that they will not be left with the bill when additional disclosure is requested.

Deferral of settlement

Where the settlement date is deferred under the agreement for sale and purchase the vendor can insist on further deferral in order to have time to comply with its obligations to attend to disclosure and provide insurance certificates.

FOR COMMERCIAL PROPERTY

CZR – GST

Where CZR applies, on or before settlement the purchaser needs to provide the vendor with the recipient’s name, address and registration number, if those details are not included in the specific GST schedule or if they have altered.

The GST schedule has been amended so that it is simpler to use.

“Default GST” has been widened to cover the positions of GST groups. Default GST is now expressly able to be included in the monies payable by the purchaser on settlement.

Land Act/OIO consent

Where these apply and no date is inserted on the front page for securing consent, then that date will be the settlement date or 65 working days after the date of the agreement, whichever is sooner. So this has been increased slightly – previously it was 2 months.

2 Free Chapters from our Facebook for Business eBook! Click here for instant download