Contributed By Anderson Lloyd
As with other commonwealth jurisdictions, New Zealand real estate law is governed by both common law and statutes. New Zealand has adopted the Torrens title system, the main principle of which is that title is guaranteed by the New Zealand government and therefore there is no need to establish 'chain of title'. As New Zealand does not operate a federal system, transfers of land interests are relatively simple and straightforward, and are overseen by a single government entity: Land Information New Zealand.
New Zealand has codified large sections of real estate law in the form of the Property Law Act 2007 and the Land Transfer Act 2017. New Zealand has also developed its own body of common law, but courts will often refer to decisions from other commonwealth jurisdictions with similar legal systems, such as Australia, the United Kingdom and Canada.
Foreign investment in New Zealand real estate is governed by the Overseas Investment Act 2005 (OIA) and its ancillary regulations. The overseas investment regime is overseen by the Overseas Investment Office (OIO), including screening applications for overseas investment.
New Zealand has been experiencing high levels of foreign investment in its real estate market, particularly in commercial/industrial/retail assets. This is likely due to:
Yields have reduced as offshore investors are more willing to pay more to secure what are seen as relatively higher returns.
Recent significant deals include:
After years of strong growth, the residential market has entered a phase of slow or – in some sectors – negative growth, driven by a number of factors, including an increase in new building, and new Government restrictions on lending and on purchases by overseas investors. Most commentators do not expect this to continue for long, due to continued high immigration levels and new building supply continuing to fall short of demand.
As further detailed in 8.4 Income Tax Withholding for Foreign Investors, there is currently a proposal to introduce a capital gains tax in New Zealand.
Almost all privately traded land in New Zealand is held under the Torrens title system, whereby each parcel of land is comprised within a Crown guaranteed record of title. The record of title contains, among other things, the name of the registered owner, the area of the subject property, a list of the registered interests affecting the property (including easements, mortgages, registered leases and profits à prendre) and a survey plan showing the parcel of land comprised within the record of title. The public can search each record of title and registered interest through an online system administered by Land Information New Zealand. Indefeasibility is a key concept of New Zealand's title system, protecting the registered owner against claims of a competing owner, and against encumbrances and interests that are not registered against the title.
There are some types of land that sit outside the Torrens system, including Maori land and Crown land. However, these types of land are not regularly dealt with by the private sector.
The most common types of legal estates comprised within records of title are as follows:
Other rights in land that are commonly granted are set out in 6.1 Types of Arrangements Allowing the Use of Real Estate for a Limited Period of Time.
The transfer of title is principally governed by the Land Transfer Act 2017. Save for fraudulent transactions, upon registration of a transfer of title, the new registered owner's ownership is indefeasible to other competing, non-registered interests.
In most cases, transferees and transferors of titles are required to disclose tax identification numbers to Land Information New Zealand, which allows the Inland Revenue Department to track ownership changes and tax liability.
There are no specific laws relating to the transfer of any particular type of commercial real estate.
The transfer of title is usually effected by the solicitors acting for the transferee and the transferor registering an electronic transfer instrument with Land Information New Zealand, which (in most cases) is instantaneously registered.
All transfers are registered on the property's record of title and can be searched online by the public.
Title insurance is used only rarely due to the guaranteed title system, which produces title searches instantaneously. Land Information New Zealand also issues guaranteed records of title, which guarantees that no interests will be registered against a record of title during the 14 days following the issue of the guaranteed title.
Due diligence will usually involve reviewing:
Purchasers may also undertake on-site inspections and tests, including building and geotechnical reports, and obtain valuations.
Most real estate transactions use a standard form sale and purchase agreement, particularly in the residential sector. Commercial contracts will usually contain negotiated terms that are specific to the nature and use of the real estate.
Typical representations and warranties include:
Generally, aside from the warranties set out in the sale and purchase agreement, 'caveat emptor' applies to most real estate transactions. However, there are also certain statutory requirements that vendors cannot contract out of, including:
Typically, warranty breaches or misrepresentations only give rise to claims for compensation and equitable set-off, which – if discovered pre-settlement – will usually result in a reduction in the amount paid by the purchaser on settlement. The suffering party will not be able to cancel the contract as a result of a misrepresentation, unless the misrepresentation relates to an essential term of the agreement or substantially impacts the benefit or burden of the agreement.
Tax law: an investor needs to ensure that it receives tax advice from an accountant before buying real estate to ensure that it structures its purchase, ownership and use of the property in the most advantageous way, and avoids unexpected tax liability.
Overseas investment law: a foreign investor needs to obtain legal advice regarding whether it requires consent under the Overseas Investment Act 2005 for its purchase.
Resource management law: an investor needs to consider whether it will need, and be able to obtain, any consents or licences from relevant authorities for its specific use of a property. Also, there may be compliance requirements relating to contamination.
Building standards: an investor needs to consider whether a building complies with the Building Act 2004. Commercial buildings and some residential and other buildings may require mandatory earthquake strengthening under recent changes to the Building Act 2004, which can be costly, time-consuming and disruptive to tenants.
Property law: an investor needs to ensure that the acquisition complies with New Zealand's laws in relation to real estate acquisitions.
An occupier or owner of a property can potentially be liable for soil pollution or environmental contamination and the cost of the remediation under the Resource Management Act 1991 (RMA), even if they did not cause the pollution or contamination. However, where there are no significant effects resulting from the pollution/contamination, liability is usually only triggered when an application is made for resource consent to a new land use activity, subdivision, or rezoning, or if there is a discharge.
District plans are prepared by city or district councils, and establish the relevant zoning of a property. A district plan includes objectives, policies and planning rules in relation to land use. Regional plans and regional coastal plans, prepared by regional councils, include objectives, policies and planning rules in relation to soil conservation, water quantity and quality, aquatic ecosystems, biodiversity and natural hazards. These two types of plans include provisions that may apply across the entire district or to a specific zone/area. Some activities are permitted under these plans and some will require resource consents before an activity is undertaken.
Some activities already being undertaken on a property may be permissible due to existing use rights.
There are also some National Environmental Standards, prepared by central government, on specific topics, which permit some activities (subject to conditions) or require resource consent.
All of the plans referred to above are publicly available, usually on the website of the relevant council.
Developer agreements can sometimes be entered into with public authorities in relation to a specific development, but these cannot circumvent resource consenting requirements. Developer agreements are usually used in relation to the delivery of a project – for example, infrastructure delivery and cost-sharing.
The Public Works Act 1981 (PWA) provides central government and local authorities (Acquiring Authorities) with statutory authority to acquire private land for public works. An Acquiring Authority may take private land for a wide range of purposes relating to public infrastructure.
The Acquiring Authority may negotiate with private landowners to purchase the land and is required to pay compensation to the private landowner, which, together with the other terms of sale, will be negotiated between the parties. The Acquiring Authority will obtain a valuation from a registered valuer, and the private landowner may also do the same to form a basis for agreement on the compensation value. The amount of compensation will depend on the circumstances, but the private landowner must be left in no better or worse position than before the land was acquired. If the value of compensation cannot be agreed between the parties, the amount of compensation payable may be determined by the Land Valuation Tribunal. Following the compensation and other terms of sale being agreed, a formal agreement for sale and purchase is prepared and signed by the parties. Following settlement of the acquisition, ownership of the land may be transferred to the Acquiring Authority, using normal conveyancing procedures or through gazette notice.
Where an agreement cannot be reached between the Acquiring Authority and private landowner, the Acquiring Authority may compulsorily acquire the land, but only after it has used all reasonable endeavours to negotiate in good faith to acquire the land by agreement. A private landowner may object to the compulsory acquisition by appealing to the Environment Court. However, the right to object to compulsory acquisition only applies to an objection to the land being taken, not the amount of compensation.
Please see 8.1 VAT, 8.2 Mitigation of Tax Liability and 8.4 Income Tax Withholding for Foreign Investors regarding taxation on real estate transfers.
The buyer and seller usually pay their own transaction costs, although in larger deals involving a significant amount of pre-contract due diligence, a seller may offer to pay all or some of a buyer's due diligence costs if the transaction does not proceed.
The Overseas Investment Act 2005 (OIA) and Overseas Investment Regulations 2005 restrict 'overseas persons' from acquiring real estate in New Zealand. Land that is 'sensitive' under the OIA cannot be purchased by a foreign purchaser without the consent of the Overseas Investment Office (OIO) or the relevant Government Ministers. Sensitive land includes:
The cost and timeframe for obtaining OIO consent varies depending on the characteristics of the land and the reasons for the purchase. As of March 2019, the OIO consent application fees range from around NZD2,000 to NZD49,000.
OIO consent is also required for a foreign investor to acquire an interest in land with a potential term of three years of more – such as a lease or option to acquire an interest. Certain interests, such as easements, are exempt.
Acquisitions of commercial real estate are generally financed in the loan market, using either bilateral secured loans or, for larger transactions, syndicated secured loans.
The largest providers of commercial real estate finance are the main Australian trading banks or their New Zealand subsidiaries. Other foreign banks and domestic and foreign credit funds are increasingly active participants in the market, and their influence continues to grow.
The larger institutional holders of real estate also access domestic and international capital markets to fund their portfolios.
In New Zealand, a financier to a commercial real estate investor who is borrowing funds to acquire or develop real estate will typically look to take the following security:
If the real estate-owning entity is a special-purpose vehicle, the financier may also look to take specific security over the shares or units in the special-purpose vehicle.
A foreign lender taking security over real estate that is classified as 'sensitive land' under the Overseas Investment Act 2005 (OIA) will be subject to the consent regime set out in that Act. However, the OIA provides for an exception from this regime (applicable to most ordinary course secured lending arrangements) in circumstances where the security over 'sensitive land' being taken by the foreign lender is part of a security arrangement that:
Nominal registration fees apply to registrations of mortgages with the Registrar of Land and registrations on the PPSR. There are no taxes or stamp duties payable in respect of the granting or enforcement of security.
New Zealand has a 'financial assistance' regime under the Companies Act 1993 (Companies Act), which provides that a company may give financial assistance to a person for the purpose of, or in connection with, the purchase of a share issued or to be issued by the company or by its holding company (whether directly or indirectly) if, before the financial assistance is given:
Under the Companies Act, directors of a company must, among other things, act in good faith, in what they believe to be the best interests of the company, and for a proper purpose. The Companies Act also permits directors to act in what they believe to be the best interests of the company's holding company (even though it may not be in the best interests of the company), provided that this is expressly permitted in the company's constitution and (where the company is not wholly-owned by the holding company) with the prior agreement of the company's shareholders other than the holding company.
There are formalities to be met before a lender is able to enforce its registered mortgage over real estate against the defaulting borrower. Typically, the lender must give a written notice of default under the Property Law Act 2007 in a prescribed form, and allow a period of 20 working days to lapse before it or its receiver takes certain enforcement action, including exercising a power of sale over the relevant land.
In a typical commercial real estate financing where the lender has a registered mortgage and all-assets security under a general security agreement, a lender wishing to enforce following a default will simply appoint a receiver under the terms of the securities. The receiver will control the real estate with a view to realisation and, other than entering into a deed of appointment with the receiver, no particular formalities are required of the lender.
In realising an asset under a security, the security holder or its receiver owes certain persons (including the grantor, any guarantors and certain other creditors of the grantor) a duty (of 'reasonable care' in the case of the security holder) to obtain the best price reasonably obtainable as at the time of sale.
A lender may voluntarily, and as a matter of contract, agree that an existing secured debt owed to it is subordinated to any other debt. Typically, this is achieved by way of a subordination deed, which will provide for the subordination of debt (and, where the other debt is secured, of security) and set out the rights of each creditor/secured party in relation to enforcement. The subordination of security is usually registered by way of priority instrument with Land Information New Zealand (for mortgages) or on the PPSR (for general/specific security interests).
Generally, a lender holding security should not become personally liable under environmental laws, as long as it does not enter into possession of the relevant real estate. Therefore, lenders typically avoid entering into possession of real estate on default and instead appoint a receiver to sell a company's assets and/or exercise their power of sale under their security without entering into possession.
Generally, validly created security interests granted by a borrower in favour of a lender will continue to be effective if the borrower becomes insolvent or enters into voluntary administration or liquidation.
However, if a company is unable to pay its due debts immediately after a security interest was granted by said company, and the charge was given within the two years prior to the commencement of the borrower's liquidation, then there is a risk that the security may be voidable by the liquidator in certain circumstances. Typically, the lender will mitigate this risk by undertaking due diligence into the company's solvency, including requiring the directors of the company to certify the borrower's solvency.
The anticipated expiry of the LIBOR index by the end of 2021 is of very limited relevance given the relatively low levels of funding in the New Zealand real estate financing market using LIBOR as a base rate.
The legal and regulatory framework supporting the resource management system is a combination of:
These controls regulate developments ranging from large national infrastructure projects to small local projects.
The exterior design, appearance and method of construction or refurbishment are regulated through the applicable district plan and the Building Act 2004 (together with the Building Code). Under a district plan, a development may be:
The Building Act 2004 and Building Code also regulate internal design and overall construction. This is administered by local authorities – prior to commencing construction, a building consent must be obtained from the local authority. The local authority will monitor construction and, following completion, certify that it has been constructed in accordance with the Building Code and the relevant building consent.
Land use and development usually fall within local government control, although matters of national significance may be "called in" to a Board of Inquiry or directly to the Environment Court in certain circumstances.
The primary legislation is the Resource Management Act 1991 (RMA), which establishes a hierarchy of national and regional policy statements and regional and district plans that give substance to the sustainable management purpose of the RMA, with increasing particularity regarding content and locality.
While the rules vary between regions and between districts, the overall framework of regulations is similar. Land use is controlled by the division of land into zones, which indicate the type of development anticipated for that land.
New projects or refurbishments will usually require resource consent, prepared in accordance with the Resource Management Act 1991 (RMA). Resource consent applications are then processed through a number of stages, including requests for further information, making a decision on notification, receiving public submissions (if notified), holding a public hearing before a commissioner (unless non-notified and decided on the papers), and issuing a decision.
The RMA sets out a process for determining whether applications are non-notified (no ability for third parties to submit or appeal), limited notified ('affected parties' are given the opportunity to submit) or publicly notified (anyone can make a submission).
Some public works may be enabled through a designation, which is a provision in a district plan. Only requiring authorities (a Minister of the Crown, a local authority and approved network utility operators) can give notice of a requirement for a designation. A notice of requirement is processed in a similar manner as a resource consent.
An applicant and any person who made a submission on a consent application/notice of requirement can appeal a council/requiring authority's decision to the Environment Court (there are some limited exceptions where there are no appeal rights). A submitter can only appeal in respect of a matter raised in that person's submission.
There is a right of appeal from the Environment Court to the High Court on points of law only.
There is also a right of objection against certain decisions (for example, in relation to existing use rights, certificates of compliances, lapse and cancellation of consents). Objections are considered by a council or independent commissioner, and in some cases objection decisions can then be appealed to the Environment Court.
Councils may impose detailed conditions on resource consents/designations with which a project must comply, including conditions relating to utilities. Conditions can include requirements that an applicant pay contributions, usually to the local council, to be used towards the provision of public services, infrastructure and amenities. It is not uncommon for developers of large projects to negotiate private developer agreements with council or utility suppliers to address these matters.
The Resource Management Act 1991 establishes several enforcement options:
Common entities include the following:
New Zealand Incorporated Companies
New Zealand companies can choose whether or not to adopt a constitution (which, if adopted, is required to be made publicly available). The constitution and shareholder agreement (if applicable) typically set out the mechanics relating to the issue and transfer of shares, the relationship between shareholders and the company, the management of the company by the directors, etc. If no constitution is adopted, the provisions of the Companies Act 1993 will apply.
Companies Incorporated Outside of New Zealand and Registered in New Zealand
The Companies Act 1993 does not apply generally to overseas companies, but applies only where the Act refers specifically to 'an overseas company'. As such, the constitution of an overseas company will usually reflect the position taken in its home jurisdiction.
New Zealand limited partnerships have their own separate legal personality and are governed by the Limited Partnerships Act 2008. Limited partnerships are a form of partnership involving general partners (who manage the partnership and are, together with the partnership itself, liable for the debts and liabilities of the partnership) and limited partners (who do not take part in the management of the partnership but are liable to the extent of their capital contribution to the partnership).
Every limited partnership must have a partnership agreement (containing certain specific matters prescribed by legislation) – this is an agreement between partners that establishes the limited partnership and governs the terms and conditions of the partnership relationship. These agreements will cover matters such as any restriction on a partner to dispose of or assign their interest, any restrictions on the business of the partnership, the entitlement of partners to distributions and whether a general partner is permitted to compete with the limited partnership.
Portfolio Investment Entities
Portfolio investment entities (PIE Funds) are managed funds that invest contributions from investors, and have special tax treatment on the returns generated from such investments, which is usually lower than a person's marginal tax rate. PIE Funds are usually structured as unit trusts and are governed by the Financial Markets Conduct Act 2013.
A trust is an entity established by a person (the settlor) to transfer legal ownership of assets including real estate to other persons (the trustees) to hold the assets on trust for the benefit of other persons selected by the settlor (the beneficiaries). Trusts are not publicly registered entities, except for charitable trusts.
There are various types of trusts, as follows:
The Trust Deed establishes the trust and governs how it is to be administered. The Trust Deed is to be read in conjunction with the applicable legislation, and will contain the following:
Real Estate Investment Trusts/Listed Property Trusts
There are nine listed property trusts (LPTs) in New Zealand, each specialising in different sectors. LPTs are publicly traded on the New Zealand Stock Exchange and are regulated in a similar manner to listed companies. Shares in LPTs can be bought and sold relatively simply, and the entry level price point is relatively low (NZD5,000). LPTs allow investors the opportunity to invest in property without having to invest a substantial amount of capital.
Investors can also invest in property syndicates, which are proportionate ownership schemes usually involving the purchase of a single property. The minimum investment is usually around NZD50,000 and, in return, the investor is entitled to a share of the returns generated from the property. The property is normally managed by a professional management company and usually generates higher returns than other real estate investments due to the higher level of risk involved (single investment, higher gearing, difficulties of selling, etc). A syndicate will usually be set up as a company, with the shares in that company being held on trust for the investors.
There are generally no minimum capital requirements in order to establish real estate investment entities, noting that:
New Zealand Companies
New Zealand incorporated companies must have a physical address in New Zealand and must also have at least one director that lives in New Zealand or Australia, and who is a director of a company incorporated in Australia. The business and affairs of the company must be managed by the board of the company, or under its direction or supervision. However, there are certain matters that require the approval of shareholders by a majority of 75% of the votes of those shareholders entitled to vote. The directors of the company are also required to comply with certain directors' duties.
Shareholders and directors must be registered with the New Zealand Companies Office.
Companies that are listed on the New Zealand Stock Exchange and listed property trusts will be subject to the relevant governance requirements contained in the listing rules.
Overseas Companies Registered in New Zealand
Overseas companies that are carrying on business in New Zealand must be registered on the Companies Office Overseas Register.
An application to register an overseas company in New Zealand must include a physical address of the company's place of business in New Zealand, and the details of one or more persons resident or incorporated in New Zealand who are authorised to accept service in New Zealand of documents on behalf of the overseas company.
Only certain requirements of the Companies Act 1993 apply to overseas companies.
A person may not be both a general partner and a limited partner of the same limited partnership. Limited partners are prohibited from taking part in the management of the partnership; however, there are certain 'safe harbour activities' (defined activities that limited partners may involve themselves in while not participating in the management of the partnership).
Every limited partnership must have a partnership agreement (containing certain specific matters prescribed by the Limited Partnerships Act 2008).
There are wide-ranging duties on trustees, which are commonly set out in the Trust Deed; in the absence of any specific provision in the Trust Deed, the Trustee Act 1956 prevails. In general terms, trustees must exercise care and diligence in exercising their powers as trustee.
Where the trust earns income, the trustees are required to file an income tax return annually with the Inland Revenue Department. All trusts require an IRD number in order to transact real estate.
The administration of charitable trusts is governed by the Charitable Trusts Act 1957, and all charitable trusts must be registered on the charities register.
New Zealand /Incorporated Company
The costs associated with the operation of a company will be determined by a number of factors, such as the size of the business, the nature of the real estate it owns and the complexity of its business operations. However, New Zealand incorporated companies are generally relatively easy to establish and maintain, and costs are usually not significant.
Overseas Company Registered in New Zealand
Overseas companies are required to complete an online annual return, and may be required to prepare, audit and file (publicly) their financial statements, depending on the scale of the business. As such, maintenance and accounting compliance costs are minimal.
The ongoing maintenance and accounting compliance requirements are similar to those of New Zealand incorporated companies.
The trustees are required to file an annual income tax return, and to prepare financial accounts where required if the trust earns income. As such, maintenance and accounting compliance requirements are likely to be nominal.
There are a range of different property rights that can be granted to a person, company or other organisation to occupy and use real estate for a limited period of time without buying it outright. The most common types of arrangements are as follows:
Easements may be registered on the record of title of the burdened land and benefited land as notice of the existence of the arrangements to the world. Easements usually allow the benefitting party to place certain infrastructure on the burdened land but will not usually confer exclusivity of possession of the easement land (ie, the landowner and its invitees will also continue to be able to use the easement land).
The most commonly used form of lease is the Auckland District Law Society Incorporated/Real Estate Institute of New Zealand Incorporated (ADLS) form. The terms of the ADLS form are considered to be reasonable as between landlord and tenant.
The other common forms of lease are produced by the Property Council of New Zealand (PCNZ). These forms are considered more comprehensive than the ADLS form, and specific forms are available for office, retail and industrial premises. The terms of a PCNZ lease are tailored to the different types of commercial property and are considered to be more landlord-friendly than the ADLS form. It is not uncommon for large landlords or tenants to develop their own form of lease, usually based on the ADLS or PCNZ lease form.
Rents and lease terms are freely negotiable. In the early 1980s there was a government-imposed 'price freeze' but it is unlikely this will occur again at any time in the near future.
A lease of part of a property that has a term of more than 35 years (including renewals) constitutes a subdivision, pursuant to the Resource Management Act 1991. The consent of the relevant local authority must be obtained for any subdivision of land. Given the expense involved in obtaining consent, this rule creates a de facto maximum term length for many leases.
The term of a lease usually depends on the size of the premises let. Smaller tenancies typically have terms of less than five years, with one or two rights of renewal of similar terms. Larger tenancies typically have terms for longer periods and more frequent renewals of longer periods.
Day-to-day repair and maintenance of the premises is usually the responsibility of the tenant. Maintenance usually includes a requirement to keep the interior of the premises in clean order and repair, and in the same condition the premises were in at the commencement of the lease. Tenants are also usually responsible for repairing glass breakages, painting the interior of the building and keeping floor coverings clean and replacing them when they become worn or damaged beyond fair wear and tear.
Landlords are usually responsible for keeping the building, all building services and the car parks in good order and repair and weatherproof, including major structural repairs. Landlords are also usually responsible for keeping and maintaining service maintenance contracts for lifts, air-conditioning and other building services.
Rent is typically paid on a monthly basis.
Rent will typically be subject to rent reviews during the term of a lease.
The most common methods of reviewing the rent are:
With regard to index-based or fixed rent increases, the rent is typically calculated by the landlord, and a tenant is usually notified by a landlord of the new rent. There is usually no dispute as to the new rent figure, as it is set by reference to an agreed metric.
With regard to market rent reviews, usually either party may initiate the review by notifying the other party of its proposed market rent. If the party receiving a market rent review notice disputes the proposed rent and the parties are not able to reach agreement, the market rent is usually determined by registered valuer(s) or arbitration.
New Zealand's VAT equivalent (goods and services tax) is payable on rent and any other payments made by a tenant under a lease.
If the parties enter into an agreement to lease (a legally binding agreement to enter into a lease), a tenant is typically required to pay a deposit as advance rent. A typical deposit amount is one month's rent.
Each party commonly pays its own legal costs of negotiating and preparing the lease.
Where there are several tenants, each tenant is commonly required to pay the landlord for their proportion of the total costs of maintenance of lawns, gardens and planted areas, and of yard and car parking area maintenance and repair charges for the property; said proportion is typically calculated with reference to the net lettable area that the premises bears to the net lettable area of the property as a whole. Major structural repair will usually be the responsibility of the landlord, although some landlords may require tenants to contribute to a maintenance fund that can then be utilised to pay for major structural repairs.
It is not unusual for each tenancy within a property to have a separate meter for various utilities, meaning that costs can be directly attributed to a particular tenancy. Where there are not separate meters or this is impractical, each tenant is usually required to pay the landlord for their proportion of the total costs for electricity, telecommunications or other utilities or services for the property, calculated with regard to the net lettable area that the premises bears to the net lettable area of the property as a whole.
The tenant typically pays for the costs of any insurance excess, insurance premiums and related valuation fees. The landlord is usually responsible for arranging and maintaining insurances in respect of the premises.
The insurance policy usually provides cover for events that cause damage and destruction to the building(s) by fire, flood, explosion, lightning, storm, earthquake and volcanic activity on a full replacement and reinstatement basis or indemnity to full insurable value. Landlords will often also obtain insurance for loss of rents for set periods (eg, 12 months).
The tenant is required to use the premises only in the manner described in the lease. However, the tenant is typically permitted to use the premises for other purposes with the prior written consent of the landlord. The landlord's consent is typically granted where the proposed use:
A change of use may also require the tenant to comply with Sections 114 and 115 of the Building Act 2004, which provides that the tenant must notify the territorial authority of the change of use and demonstrate that the change of use does not contravene the building code.
A landlord may also require – particularly in the context of a retail premises – the tenant to keep its premises open during usual trading hours and stocked with appropriate merchandise, to ensure the tenant's premises are not deleterious to other adjoining retail premises.
The tenant is usually permitted to alter or improve the demised premises with the prior written consent of the landlord. In obtaining the consent of the landlord, the tenant is usually required to produce plans and specifications for the proposed alterations, to be reviewed and approved by the landlord. When undergoing building work, the tenant may also be required to obtain a building consent and code compliance certificate pursuant to the Building Act 2004. The tenant is also typically required to provide copies of the building consent and code compliance certificates to the landlord.
Landlords of residential tenancies must comply with a number of specific laws and regulations, including:
All residential tenancies are governed by the RTA, which outlines the rights and obligations of a landlord and tenant. It also requires a landlord and tenant to enter into a written tenancy agreement, which outlines the terms and conditions of the tenancy.
There are two types of tenancy pursuant to the RTA – periodic tenancies and fixed term tenancies. A periodic tenancy has no expiry date and continues until either the tenant or the landlord gives notice to the other party that it is at an end. A tenant must give at least 21 days' written notice to end a tenancy, unless a landlord agrees to a shorter time. A landlord must give at least 90 days' written notice to end a tenancy, although a shorter timeframe of 42 days' notice is available in the following circumstances:
A fixed-term tenancy has an expiry date. It may be extended or renewed if the parties agree.
The HIR outline the minimum requirements of a residential tenancy, and include provisions for:
The HIR ensure that landlords let properties that are in a habitable state to tenants.
The RTSAI Regulations require landlords to ensure that residential tenancies are warm, dry and safe. From 1 July 2019, landlords must ensure that all rental properties have ceiling and underfloor insulation installed where it is reasonably practicable to do so. Landlords must also ensure that a form of heating is provided in the living room of a residential tenancy, and that there are working smoke alarms installed.
There are no specific regulations and/or laws that apply to leases for the particular categories of real estate of industrial, offices, retail or hotels.
Leases commonly provide that the lease is immediately terminable on the event of a tenant's insolvency; however, there is no statutory legislation deeming this to be the case. Where a tenant is insolvent, it may have an ability to disclaim a lease, depending on the winding up process adopted (effectively bringing it to an end).
There are three forms of security that are commonly required by a landlord to protect against failure by a tenant to meet its obligations:
Personal guarantees are particularly common where the tenant is a company or a trust. Usually, the guarantee to meet the obligations of the tenant will be given by someone obtaining a benefit from the lease, such as a director or major shareholder.
A bond or security deposit is a lump-sum payment to be held in an account (usually a solicitor's trust account) as security for performance of the tenant's obligations pursuant to the lease.
A bank guarantee is an agreement provided by a bank to pay a specified sum to a landlord on demand where there is a tenant default. Bank guarantees are typically for an amount equivalent to six months' rent. Bank guarantees are a popular form of security from a landlord's perspective as they do not require the landlord to make a formal demand on the tenant; they are also popular with tenants, as the tenant does not necessarily have to retain the amount of the bank guarantee in cash in its accounts with the bank.
If a landlord permits a tenant to remain in occupation of the premises after the expiry or earlier termination of the lease, the occupation is deemed a periodic tenancy and the lease may be terminated by either party giving 20 working days' notice to the other. The terms of the periodic tenancy will be the same as the terms of the lease.
A landlord should clearly communicate with the tenant to ensure that it leaves on the expiry date of the lease. If necessary, the landlord may need to serve formal notice of the expiry date. Following the expiry date, the landlord is entitled to enter the premises and change the locks if need be.
A landlord may terminate a lease where the tenant is in default under the lease and fails to remedy the default after receiving notice from the landlord to do so. The most common reason for default is the tenant's failure to pay rent or outgoings. The tenant may also be in breach of other obligations under the lease, such as failing to comply with its maintenance obligations. A tenant becoming insolvent or going into receivership or liquidation is also typically a default.
A lease may also typically be terminated where the premises are totally destroyed or so damaged that they are untenantable or require demolition or reconstruction. If the premises are only partially destroyed, a lease may also typically be terminated where the landlord cannot obtain a permit or consent to repair the damage to the premises, or where the insurance moneys received for the damage are inadequate to repair or reinstate the premises.
Leases also typically include 'no access' provisions following the major earthquake in Christchurch in 2011 and other earthquake events in New Zealand since. These provisions allow either party to terminate a lease if the tenant is unable to access the premises for a specified period (usually nine months) or if it can be established with reasonable certainty that access will not be able to be granted during the specified period.
A tenant may be forced to leave the premises if they are in default of the lease terms. The Property Law Act 2007 (PLA) sets out the process that must be followed before a commercial tenant can be evicted, and the lease formally terminated.
The PLA requires that notice must first be served on a tenant, setting out the essential details concerning the default, including the nature of the breach, the remedy required and the tenant's rights. It must be properly served in accordance with the requirements of the PLA.
The period to remedy the breach must not be less than ten working days in the case of failure to pay rent, or a timeframe that is reasonable in the circumstances for a breach of any other covenant. Failure by the landlord to comply with the requirements of the PLA can render a notice invalid, so it is important that the notice is carefully prepared. A tenant may apply to the Court for relief against termination of a lease where the notice is deemed to be invalid. The Court may award damages against a landlord who unlawfully terminates a lease.
The landlord may re-enter the premises following the expiry of the notice. If the landlord cannot re-enter peaceably, it is strongly recommended that the landlord does not attempt to continue to re-enter the premises and instead obtains a court order granting possession.
A government or municipal authority may acquire a leasehold estate pursuant to the Public Works Act 1981 (PWA). The relevant authority must comply with the procedures in the PWA. It may acquire the leasehold estate by negotiation or compulsorily. The timeframe involved will depend on the length of negotiations with the landlord and tenant. Compensation is payable by the relevant authority, and is not limited to the value of the land taken. Compensation may also be paid for permanent depreciation in the value of any retained land (injurious affection), damage to any land or disturbance resulting from the acquisition, including business loss resulting from relocation.
Lump sum contracts: these involve a fixed price for a defined scope of work. However, the price can change if the owner alters the design/works, or if unexpected circumstances are encountered.
Measure and value contracts: a schedule of prices is usually agreed at the outset (eg, a rate per unit of work), and the quantity of work is then measured/assessed and paid accordingly.
Cost reimbursement contracts: the owner pays the contractor its net costs plus a pre-agreed margin. This is less common than the above options due to the lack of costs certainty/control, and because it can create an incentive for the contractor to spend more time on the works.
Also, the use of alliances and other forms of collaborative contracting is increasing on major projects.
There are two main categories of construction contract and design risk allocation in New Zealand: construct only, and design and construct.
The contractor is responsible for its methodology of construction based on the design, but not for errors or omissions in that design. Between the contractor and the owner, the design risk sits with the owner. Typically, the owner separately contracts who will be responsible for the design risk.
The freedom to choose a particular designer can be attractive to an owner, but it can lead to issues:
Design and Construct
The contractor is responsible for both the design and the construction of the works (if the Principal has a pre-existing design, it may be novated to the contractor). This approach simplifies responsibility, but it usually comes at a significant price premium and can reduce the number of potential tenderers, because smaller contractors often lack in-house designers and may be unwilling or unable to partner with a design firm.
Engineering, procurement and construction management arrangements where the head contractor project manages a set of specialist contractors and consultants are less common in New Zealand. Alliancing contracts that share the risks of design and construction are usually limited to larger projects where there is a high degree of uncertainty and risk.
Allocation of Risks
Cost overruns (due to unexpected circumstances or otherwise) are one of the most significant risks on a construction project. These are largely managed/allocated by whether or not the contract allows the contractor to claim a variation if the stated risks occur.
Cross-indemnities are commonly given for key risks that are within a party's control, such as:
The owner is also usually indemnified for the cost of constructing or remedying defects in the works.
Limitations on indemnities
Indemnities and insurance for statutory fines or infringement fees are unlawful under, amongst others, the Health and Safety at Work Act 2015. Accordingly, indemnities should be limited "to the extent permitted by law", especially those relating to breaches of law or death or injury to persons.
A wide range of contractual warranties are usually given by each side. The owner usually warrants that it has made the contractor aware of all pertinent information, while the contractor provides a range of warranties relating to its performance and the quality of the works. Owners often also require collateral warranties from contractors and subcontractors.
Some warranties are incorporated into particular contracts (eg, consumer contracts) by statute. These include:
Limitation and Exclusion of Risks
Parties commonly exclude liability for loss of profits, loss of revenue, loss of goodwill, and indirect or consequential losses. However, an exclusion of liability is not included by default in the New Zealand Standards suite of construction contracts.
Contractors sometimes seek a cap on liability under the contract, but this is not standard practice, and liability caps are not included by default in the New Zealand Standards suite of construction contracts. In contrast, consultants almost universally cap liability at the level of their professional indemnity insurance.
Limitations on exclusions/caps
The law prohibits the limitation or exclusion of some forms of liability – eg, statutory penalties, or losses arising from fraud or criminal conduct.
Statutory time limitations
The Limitation Act 2010 and the Building Act 2004 together provide contractors with a defence to civil proceedings if too much time has passed between a claim arising and the claim being brought.
The general rule in New Zealand is that where there are multiple parties who have caused the same loss, each can be liable for the whole of the loss. The owner does not have to apportion that loss among the wrongdoers, unless the contract provides otherwise.
The contractor is usually required to complete the works within a stated number of working days. Contracts usually allow for that period to be extended if certain events occur. The prevention principle also operates to replace a stated period with a reasonable time period, if delays are caused by an act or omission of the owner and the contract does not provide an extension of time.
If the contractor does not complete the works within the applicable period, then the owner could be entitled to damages for losses caused by that delay. Delay liquidated damages are commonly specified in the contract, and such liquidated damages are enforceable to the extent that they do not amount to a penalty. The law regarding penalties is evolving, but recent cases indicate that New Zealand is moving towards the test approved by the UK Supreme Court, which considers whether the liquidated damages protect a legitimate commercial interest.
It is very common for owners to require some form of security from contractors to secure proper performance of the construction contract. Common forms of security in New Zealand for construction contracts include the following:
In limited circumstances, a contractor may be able to retain materials in its possession under a lien. However, to prevent payment disputes from delaying projects, commercial contracts typically preclude a contractor or designer from exercising any right of lien or otherwise encumbering project materials.
Contractors can more effectively protect their security interests in materials by registering financing statements on the personal property security register. Owners can discharge or change incorrectly registered financing statements by following the change demand process in the Personal Property Securities Act 1999.
Contractors and designers also have rights to obtain payment and efficiently settle disputes under the Construction Contracts Act 2002.
To comply with the Building Act 2004, owners need to obtain a code compliance certificate from the appropriate territorial authority. This is required before the public occupation, or sale, of the building. In some instances, an owner can obtain a certificate for public use to allow public access to the premises before a code compliance certificate is granted.
Owners of buildings with particular systems (eg, sprinklers, fire alarms, lifts) also need to have a compliance schedule and file an annual building warrant of fitness to confirm that the specified systems are maintained and operating effectively.
Owners should also keep the following in mind:
In general, New Zealand's equivalent to VAT (goods and services tax – GST) is payable on all real estate transactions, unless the real estate is used solely for making exempt supplies (which includes residential accommodation) or the transaction is compulsorily zero rated for GST.
GST is calculated at 15% of the GST-exclusive consideration for the supply (ie, the purchase price of the real estate, excluding GST).
Compulsory zero-rating generally applies to transactions involving land between GST registered persons, provided that the purchaser intends on using the land to make taxable supplies. Where the transaction is zero-rated, no GST is added to the sale price and no GST is returned by the vendor or claimed by the purchaser. However, the purchaser may be required to account for GST if the property will only partly be used for making exempt supplies. Due to the compulsory zero rating rules, GST is seldom payable in commercial transactions.
No transfer or recordation tax or stamp duty is payable on real estate transactions in New Zealand, aside from nominal Land Information New Zealand registration fees.
Local councils in all areas of New Zealand charge annual rates on land within their respective jurisdictions. These are usually assessed by reference to the value of the land. There are also additional rates charged for commercial properties and hotel operators. Rates are payable on all land, except certain land used for public, charitable or religious purposes.
While rates are the responsibility of the property owner, they are generally passed on to commercial tenants as a term of their lease.
Where a non-New Zealand tax resident receives passive income (including interest, dividends or royalties) from New Zealand tax residents, non-resident withholding tax (NRWT) must be deducted by the payor. The rates at which NRWT is deducted depend on the terms of any double tax agreement New Zealand has in place with the non-resident's country. If there is no double tax agreement in place, then the default NRWT rates are 15% for interest and royalties and 30% for dividends.
The general position in New Zealand is that any income received from leasing a property to a tenant will be taxed as ordinary income of the recipient. For companies, the rental income received is added to the company's annual tax returns.
New Zealand companies are subject to a flat income tax rate of 28%. Individuals are subject to marginal income tax rates, the highest of which is 33% for income over NZD70,000 per annum.
GST is also payable on non-residential rents, at a rate of 15%. This is almost always paid by the tenant to the landlord, who in turn accounts to the Inland Revenue for the GST payments received.
In general, capital gains made when disposing of property are tax-free in New Zealand. However, there are a number of exceptions that give rise to the taxation of capital gains, including:
In each case, any gain will be taxed at the person's marginal tax rate.
The results of a tax system review commissioned by the current government have just been announced. The working group that undertook the review strongly recommended the introduction of a broader capital gains tax than currently in place. However, the government has yet to adopt any of the recommendations.
Tax deductions may be claimed for a variety of expenses incurred in connection with the generation of rental income. Such deductions include repair and maintenance costs, and interest costs on finance used to acquire the property, as well as rates and insurance. Property owners can also depreciate fixtures, fittings and chattels but not the land and buildings themselves. Typically in a commercial leasing scenario, as tenants own the fit out, there is little scope for landlords to claim any depreciation.
While there are tax benefits in terms of deductions and depreciation, the main tax benefits from owning real estate are the tax-free capital gains.