New Property Law Act creates positive reforms

By Jane Holland, Partner

The Property Law Act 2007 will come into effect on 1 January 2008 and should help provide certainty in property dealings, facilitate the resolution of disputes and reduce litigation.

The Act replaces and repeals the Property Law Act 1952, bringing the law of property into the 21st century. Many ancient English statutes are finally repealed, with the restatement, reform and codification of the law relating to real and personal property.

So what will the changes mean in practice? We highlight some of the key provisions. More detail can be found in the reports of the Law Commission and the Justice Electoral Committee, which together provide a comprehensive explanation of the changes. The reports can be downloaded from the New Zealand Parliament website, click here.

What's new?

Sale and Purchase Agreements

• The vendor's right to cancel where the purchaser is in possession of the land is specifically provided for.

• There is a brand new provision introducing the right for a purchaser to claim the return of the deposit. This could arise, for example, where there is a defect in the property of which the purchaser is unaware. The vendor has no legal duty to disclose the information, and it is not a serious enough breach by the vendor to allow cancellation under the Contractual Remedies Act 1979. This provision entitles a purchaser to claim the return of the deposit where the court would not order specific performance of the agreement, and the purchaser is not entitled to cancel. This relief will be available for any contract coming into operation after 31 December 2007. The court also has the discretion to cancel the agreement or give the purchaser a lien over the land to secure payment. It will be interesting to see how this relief is applied by the courts.

Access Lots

The current position relating to access lots that are, or include a driveway, or proposed driveway, is untidy for subsequent owners when issues relating to maintenance and repair arise. The Act rectifies this by effectively bringing these access lots under the same regime of rights granted for vehicular rights of way.

Mandatory provisions on the service of certain types of notices

The Act introduces a mandatory form and procedure for service of five specific notices, namely:

1. Vendor's notice to cancel agreement for sale and purchase and regain possession of the land.

2. Notice calling up a mortgage.

3. Notice of mortgagee's intention to exercise power for sale, enter into possession, or call in the mortgage under an acceleration clause.

4. Notice of the landlord's intention to cancel the lease for breach of covenant or condition.

5. Landlord's notice of refusal to grant a renewal or sale of the reversion

There is no mandatory procedure for all other notices.

Leases

Short term lease

This is a new concept. A short term lease is an unregistered lease for a term of one year or less. It replaces the previous unregistered lease of a term of less than three years. Unless the new short term lease is a residential tenancy, it does not have to be in writing to be enforceable.

Distress

This antiquated right of the landlord to seize goods for rent arrears has been abolished.

Improved insurance protection for tenants

If the tenant damages the property, the landlord may repair the damage and recover the cost of the repairs from its insurer. Should that happen, the insurer can choose to exercise its subrogation rights, and recover the repair monies it has paid out to the landlord from the tenant. Alternatively, the landlord can often choose not to make any insurance claim and require the tenant to repair the damage.

The Act changes this so that where the premises are destroyed or damaged by an insured risk the landlord cannot require the tenant to meet the costs, or to indemnify the landlord against the costs, of making good any damage to the property even if the destruction or damage is caused or contributed to by the negligence of the tenant or its agent.

However, if the damage was caused by a deliberate or illegal act by the tenant or its agent, or their actions render the insurance monies irrecoverable, the landlord does not have to indemnify the tenant. In addition, where the tenant or its agent's negligence affects the landlord's ability to obtain or retain insurance on reasonable terms, the landlord is entitled to cancel the lease or recover the increased insurance costs from the tenant.

The parties can contract out of these insurance provisions in circumstances where they agree that the landlord will not insure against a certain risk. This would need to be expressly provided for in the lease. This provision will affect damage or destruction happening from 1 January 2008.

Cancellation not forfeiture

The Act updates the references to "forfeiture" of lease replacing it with "cancellation". This provides consistency with the terminology in more recent statutes, such as the Contractual Remedies Act 1979. One of the significant changes to note is that where the tenant is in breach of the covenant to pay rent the landlord cannot cancel the lease until the appropriate notice in the form provided by the Act is served. In addition, if the names and addresses of any mortgagee, receiver or subtenant and the mortgagee or receiver of any subtenant are known to the landlord, the landlord must also serve notice on them, although failure to notify them does not invalidate the notice, but potentially extends out the period when relief from cancellation can be applied for.

Assignments are effective immediately

The Act codifies the present position, that even if an assignment occurs which is in breach of a covenant against assignment, that assignment is effective immediately. The assignee becomes automatically liable to pay the rent and observe the lease terms without the need for execution of further documents. However, this does not prevent the landlord from peaceably re-entering, cancelling the lease or making a claim for breach of the covenant to obtain consent to assignment. The prior tenant still remains liable for the payment of rent and observance of the tenant's covenants in the lease.

Sublease term

Where a sublease is created on or after 1 January 2008 for a term which is the same as, or longer than, the term of the superior lease, the Act reverses the present position providing that this will not operate as an assignment of the superior lease, unless a contrary intention appears. It will be interesting to see how a contrary intention is interpreted by the courts, so we would recommend express provisions continue be contained in a lease where the term of the sublease being granted potentially extends beyond the term of the superior lease.

Landlord's consent - no more delay

The Act goes further than the previous law. Where a lease provides for the landlord's consent, consent cannot be unreasonably withheld or delayed. The parties can contract out of this in relation to certain matters (consent to alterations or signage, for instance), but for landlord's consent to assign, sublet, mortgage, or change of use, unless there is an absolute prohibition against these events, the landlord cannot unreasonably withhold or delay consent.

The Act sets out the circumstances where consent will be deemed to be unreasonably withheld, but goes further as consent will be unreasonably withheld if it imposes on the tenant an unreasonable condition or precondition, or because the tenant is bankrupt, in receivership or liquidation. Damages may also be recovered from the landlord where the tenant/assignee/sub-lessee/mortgagee has suffered loss as a result of the landlord unreasonably withholding or delaying consent. In many cases (particularly for retail leases) landlords will want to prohibit changes of use, so that these can be dealt with at the landlord's discretion.

Enquiries and information

For more information on any of the cases, articles and features in Property Update, please email Tom Bennett or call on 64 9 916 8789.