Parry Field are now registered as a Service Provider under the Regional Business Partner Network. If you are looking to grow your business but require some support, you may qualify for vouchers to help pay for services, as Parry Field are able to provide legal support in the following categories:

Business Planning: We can provide training for Directors of businesses who are looking at their plans and considering what changes they might need to put in place or those who are looking to start a business and are planning the first steps they need to take when it comes to legal structures.

Capital Raising: Growing your business is important and we can provide training around how business owners can raise funding for their venture, covering topics such as types of investors, due diligence processes, Financial Market Authority rules and documentation often needed, such as share Sale and Purchase Agreements and Shareholder Agreements.

Governance: It is important that you have all the right practices, processes and policies in place in order to guide your business in the right direction. Therefore, it is important to know and understand how to run a business, as well as the legal obligations that are associated with it. We can provide you with the knowledge of different legal structures that will assist you in deciding the best structure for the business based on what stage it is at. We will also assist with director duties, governance documents, explain how these work and the importance of having the right documents in place.

If you would like to know more, please contact the Regional Business Partner Network www.regionalbusinesspartners.co.nz

In part one and two of our articles on buying and selling a business we looked at both the important issues and what the agreement for sale and purchase should cover.  In part three, we will consider the impact of Covid-19 and how it has affected the buying and selling process and further points that need to be considered during these unprecedented times.  Whether you are considering selling or purchasing a business, or you have just started the process, the following should be taken into consideration:

Due Diligence

In part one, we explored the importance of due diligence and key questions that should be asked. The effects of Covid-19 should not alter your approach to carrying out due diligence, in fact it may be that a more rigorous approach is taken by buyers to understand the implications Covid-19 has had on the business and how it would fare if another situation like this were to happen again. When carrying out due diligence, both seller and purchaser should be mindful that more time may be required to undertake and complete the process due to the restrictions in place, as the ability to obtain information such as important documentation or carrying out physical inspections may not be possible right away.

Material Adverse Change Clauses

As we are in the midst of the unknown, agreements between buyer and seller will be subject to greater scrutiny and negotiation. The inclusion of material adverse change (MAC) clauses in an agreement is likely to be of particular interest, especially to a buyer. A MAC clause is used to reduce risk and uncertainty for buyers during the period between the agreement and the date the deal closes. Such clauses give the right for the buyer to walk away from a deal. For a seller, taking the current climate into consideration the inclusion of such a clause should be drafted carefully, thinking about what is considered to be a change and looking to the future and the potential of a similar situation occurring again.

Finance

As a buyer, if you are obtaining finance from a third party such as bank, it may take longer and become more difficult. In these uncertain times, banks may be reluctant to lend or may seek additional requirements are satisfied in order to obtain approval. Therefore, it important that the sale and purchase documentation covers the risks that are associated with lending during this time.   For example, the seller may want to include a break fee, if finance is unable to be obtained by the buyer. Where a buyer may want the ability to walk away from the deal and have a financing out condition. It will be up the parties to balance the risk and reach an agreement that they are both comfortable with.

Warranties

In this current climate, sellers may be reluctant to agree to warranties about the state of the business, as the long term effects of Covid-19 on a business may not be known for some time. While for buyers it may be that they look at additional situation-specific warranties in relation to this pandemic. Warranties will be subject to robust negations even more so than before, therefore again, it will come down to the parties being able to find the right balance in terms risk.

Other Conditions

The uncertainty for many businesses during this time may see the inclusion of other conditions in a sale and purchase agreement. Such conditions may relate to maintaining current suppliers or current employees.

Conclusion

As the restrictions ease, many are still trying to navigate their way through the unknown.  It is difficult to know the long term implications of Covid-19 and effects that it will have had on the businesses that survived the lockdown period. Therefore, it will be important for those looking to buy a business to ensure they have done their ‘homework’. While sellers will need to be upfront and ensure they are covered if a situation like this were to ever occur again.

We often help both buyers or sellers of businesses and in this unique context would be happy to talk about your situation to make sure the agreements work well.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist in your journey. Please feel free to contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com should you require assistance.

What should the agreement cover?  

In the first part on buying or selling a business here we saw there were some big picture things you need to think about when buying a business.  This part will look at what the agreement for sale and purchase should cover and some key things that need to be thought through.  While written from the point of view of a Purchaser, it will also raise the same issues that a Seller will need to think through.

Assuming the decision is to purchase the business (rather than the shares of the company – this point was touched on above) then a commonly used template agreement in New Zealand is produced by the Auckland District Law Society.  While it provides a base and a process it can also be adapted to reflect the situation.  In terms of process what usually happens is the agreement gets signed and it is subject to conditions – once those conditions are satisfied it may Just a few examples of the way that it can be customised are:

  • Documents to be supplied: We commonly add in many additional terms which relate to the due diligence discussed above and what records will be provided.  This usually involves a careful discussion with the client to determine what they expect to see and then being clear about what they have.  If you ask for a licence that the seller should have and they cannot provide it, then obviously a red flag goes up.
  • Conditions: These could include the purchaser arranging finance for the purchase by a certain date, being satisfied with the results of the due diligence, having the lease (if there is one) assigned to the purchaser, obtaining consents or licenses needed.  Again, this will vary depending on the business so there is no standard wording that can just be pasted in.
  • Warranties: It is common to include warranties – these are essentially statements by the Seller about the state of the business. For example, a warranty might state that there is no litigation that the company is a party to.  Often these will be subject to robust negotiations – for example, the Seller may want this to say “as far as I am aware” (a knowledge qualifier), or refer to a monetary value such as there being no disputes above “x” dollars (a monetary threshold qualifier).
  • Restraints: It is common to include restraints on the seller of the business – particularly if it were, for example, a catering business or there was potential that they start something new that competes.  Restraints need to be reasonable and usually will involve a certain time period such as one year and there will be a geographic area which is specified.  Again, this can be a point of rigorous negotiations.
  • Intellectual property: Goodwill and reputation often make up a big part of the value of the business which is being purchased so it is important to be clear about what that includes – for example, names (are they trademarked?), website, Facebook pages, client lists, patents or other registrations.
  • Contracts: As part of the due diligence it is important to look at the really key contracts for the business and focus on whether they have change of control provisions and/or the ability to novate or assign to a purchaser.  It might be that there will be issues with the purchaser taking on contracts so that is important to find out as quickly as possible.
  • Tax and accounting: We always advise involving an accountant to assist with these aspects and confirming with them the tax position – for example, that the transfer will be free of GST.  Most of the time both entities will be registered for GST and no GST will be charged but it is far better to get this clear from the start than needing to have a last minute panic.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist in your journey. Please feel free to contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com should you require assistance.

In the last few months we have been helping several people as they purchase businesses.  At the same time there have been other clients who are selling their business.  It seems like for both sets of people there are some basic questions that they always have.  This article tries to answer and clarify with some answers to some of the common points regarding the usual process involved and what documentation is required.  A part 2 then deals with what the agreement for sale and purchase would normally cover. While this is written from the point of view of a Purchaser, it will also raise the same issues that a Seller will need to think through.

So, what are you actually buying?

One of the first things to think about is what you are actually buying.  This can be confusing but think about it this way – are you buying the assets of the company, or the company itself?  It is very common in New Zealand to simply purchase the assets and the business rather than the company.  This is because if you buy the shares of the company then you are stepping into the shoes of that company – which means you get what it owns but you also could get what it owes.  So the key here is to be clear about what you actually want and the usual advice would be that purchasing the business and assets is best.  Having said that, there may be reasons why purchasing the shares of a company is necessary and you actually want to take on board all that it has – including licenses and registrations – so every situation needs to be thought through.

Due diligence

It is one thing to see an opportunity and have some chats with the founder of a business about how great it is going.  It is quite another to do extensive due diligence and satisfy yourself that everything is as claimed.  A good due diligence process will bring to light anything which you need to be aware of as a purchaser.  For example, the founder may have told you that they have both great suppliers and customers – is that all verbal agreements or are there robust agreements in place which specify how those relationships are governed?  What licenses are in place – or not in place?  What disputes are there or litigation or potential claims?  What do the accounts reveal?  Is the lease about to expire?  How about relationships with employees?

What does a due diligence involve?

A good due diligence process will see the Seller provide access to all the key documents of the business so you can thoroughly examine them.  This will likely involve advisers such as accountants and lawyers to look through documents.  If you are considering selling a business then the counterpoint here is to keep good records.  How many times have I been involved in due diligences where the Seller has no records of decisions or no contracts in place?  Far too many times – a Purchaser will be scared off if you cannot show clean records and processes.  And if you are a start-up, begin keeping good records right from the start, it will make it far easier to get investors or sell out later on.

Other things to thing about…

There are many other points which we could cover and some hints are: Which employees will come over?  What are the actual assets?  Is the price sensible when looking at the accounts?  Given the industry is there any potential for large claims or liability?  What is the goodwill actually worth?  Is there a reason they want to sell now?  What future changes  might there be in the industry that will affect the business?

Conclusion

We hope this is a helpful overview of some of the things to think about when buying – or selling – a business.  In part 2 we will look at what the agreement for sale and purchase should cover. In fact the issues and things that need to be thought through will be the same no matter how many zeros there are on the end of the purchase price.  The key thing is to remember that every transaction will be unique and so it is important to take a customised approach to what you ask for in the agreement, whether you are a buyer or seller.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist in your journey. Please feel free to contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com should you require assistance.

Global economic uncertainty as a result of COVID-19 will impact house purchases.  On 30 April 2020, the Reserve Bank of New Zealand (RBNZ) announced the removal of mortgage loan-to-value ratio (LVR) restrictions for 12 months. The decision was made to ensure LVR restrictions did not have an undue impact on borrowers or lenders as part of the mortgage deferral scheme implemented in response to the economic downturn caused by the COVID-19 pandemic.  In this article we discuss what the changes are and the likely impact they will have.

LVR: What Does It Mean?

LVR is the amount of loan compared to the value of your property. For example, if the property is worth $500,000 and you have a deposit of $100,000, the LVR will be 80 percent meaning the loan cannot be higher than $400,000.  LVR restrictions were introduced by the RBNZ in October 2013, as it was concerned about the rate at which house prices were increasing and the potential risk that it posed to the financial system and the broader economy. These restrictions required banks to restrict new residential mortgage lending at LVRs over 80 percent and allowing no more than 20 percent of its total new lending in this category. This placed restrictions on New Zealand banks and the amount of low deposit lending they could do.

If you were thinking about purchasing a home and had a deposit of less than 20 percent of the home’s value, your home loan application would have been affected by the LVR restrictions. Your application would have had to go through a number of assessments by the bank in order to determine whether it could lend you money or not. If successful, borrowers would face an additional fee called a low equity margin. This resulted in a percentage added to your interest rate that remained there until your loan reduced to the 80 percent threshold. These restrictions certainly did not make it easy for first home buyers and many felt they had been locked out of the property market. However, such restrictions clearly did not deter them. In December 2019 the amount advanced on mortgages was $6.5 billion, with $1.2 billion being advanced to first home buyers, giving this group its highest share since August 2014 (at 18.5%).

Removing LVR

The announcement from the RBNZ to remove LVR restrictions was a strategic one to bolster the economy and increase demand for property as New Zealand comes out of lockdown, with this decision to be revaluated in 12 months. The removal of restrictions on the amount of money that can be lent to high-LVR borrowers will not only have an impact on new home buyers, but also investment property buyers and those who are already current homeowners.

First Home Buyers

If you have been looking at buying your first home for some time but have been put off by the LVR restrictions, the announcement may have come as a breath of fresh air to you. While it is likely that low equity margin rates may still be applicable, as long as you are credit worthy with income and meet the bank’s lending criteria, you could very well be on your way to buying your first home. The removal of LVRs will not only mean it will now be easier for you to obtain lending, it will also mean that you will now have the opportunity to ‘shop around’ and choose a bank that best suits your circumstances. Up until now, you may only have been able to get a pre-approval from your current bank, as most banks have been reluctant to give pre-approvals to non-bank clients in case their existing clients could not be approved. This should no longer be the case and an opportunity is there to be taken advantage of.

Investment Property Buyers

Due to the higher risks associated with these types of loans, the current policy classifies investor loans as high-LVR if they are more than 70 percent of the property’s value. These high-LVR loans could make up no more than 5 percent of a bank’s total new lending in this category. It is likely that this percentage will increase over time, but given the period of uncertainty we are in, it is hard to gauge when this will occur and what the removal of LVR restrictions will truly look like for investment property buyers.

Current Homeowners

The impact on current homeowners is minimal. However, this may make it easier to apply for home loan top ups, especially if you were already close to the 80 percent threshold. It may also mean if you have suffered a loss of income or your property value has decreased to mean your mortgage is now over 80 percent, it may not be as dire for you or the bank as it was before.

Conclusion

The announcement from the RBNZ to remove LVR restrictions was certainly welcomed, especially as the implications of Covid-19 from a financial point of view continue to be negatively felt throughout the country. It will certainly be interesting to see what occurs over the next 12 months as the impact of Covid-19 becomes clearer and whether LVR restrictions will be reinstated.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. We would be happy to assist you in your journey. Please feel free to contact Judith Bullin at judithbullin@parryfield.com or Paul Owens at paulowens@parryfield.com should you require assistance.

Implications of the Covid-19 lockdown

In property transactions, each party must sign an Authority and Instruction form allowing their respective lawyers the ability to make changes to a property’s title on their behalf. Physical signatures on these documents must typically be witnessed by a lawyer or Justice of the Peace. However, in response to the Covid-19 situation, interim guidelines issued by Land Information New Zealand (LINZ) record that Authority and Instruction forms can be signed by means of an electronic signature — until at least these guidelines are revoked. Alternatively, wet-ink physical signatures will need to be witnessed over a video link.

The Government has also made a temporary law change to modify the requirements of witnessing and signing wills and enduring power of attorneys (EPAs). These changes allow wills and EPAs to be signed and witnessed using audio-visual links (for example Zoom, Facetime and Skype etc). For further guidance on how these documents can be witnessed and signed,  it is explained here for wills and explained here for EPAs.

In terms of statutory declarations and affidavits, it appears that these may be administered electronically — however, physical signatures would still be required. As above, signatures in these cases need to be witnessed over a reliable video link .

It is still understood that powers of attorney and enduring powers of attorney (and presumably Wills and the like) cannot be signed electronically.

If anything is not clear here then we would be happy to discuss with you — as usual individual circumstances usually mean that the context is important to consider.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. Please feel free to contact Steven Moe at stevenmoe@parryfield.com should you require assistance.

The law recognises that in certain events which are beyond the control of a party that it is not fair for that party to have to continue to comply with the contract.  In light of COVID-19 it is prudent to consider if the pandemic might be a trigger for this in your contracts.

The first step is to check what the contract actually says.  It won’t apply if there is no such provision in the contract.  Normally it will be called a “Force Majeure” clause.  The courts will generally have a high standard if a party wants to rely on this as a grounds to not fulfill the contract.  The sort of factors which will be relevant are:

  • How are the events described?  Is it generic or specific?  In this particular case it will be relevant to see if there is any reference to “disease” or better, epidemics?  If there is a reference to an “Act of God” then that might arguably cover this too.  The most important thing is to check the specific words.
  • Even if there is an event, does that mean that the performance cannot be done?  Just because something costs more doesn’t make it impossible – it may be that you still have to comply.  Again, the context is key.
  • A party needs to be in control – one of the things I have seen is some arguments that a “strike” should be a force majeure event – if it is listed then it may be, but typically the management can control a strike occurring, or not.  So, it might not qualify as a force majeure event.  When it comes to COVID-19 again it may be that a party has no control.
  • The last factor relates to mitigation.  A party should take steps to ensure that the contract is complied with (ie they are mitigating and stopping the impact, if they can).The key point here is perhaps that the wording of the contract needs to be reviewed.  If there is no such clause then it might be possible for the doctrine of frustration to apply – this is where an event makes performance impossible compared to what had been agreed.  Again, context is key.The other thing to look for in contracts would be a “material adverse change” clause – these can apply where an event occurs that means the contract is affected.  You should also review any termination clauses just to see what they provide for eg 30 days written notice?Start by reviewing your contracts and consider your current situation and what the next few weeks and months will hold.  If you would like to discuss your contract and situation then we would be happy to do so.

This article is not a substitute for legal advice and you should consult your lawyer about your specific situation. For any questions, feel free to contact Steven Moe stevenmoe@parryfield.com or Kris Morrison krismorrison@parryfield.com at Parry Field Lawyers.

We live in unprecedented times. In this short guide we have set out key issues which we think Businesses in New Zealand should be focussed on.

We will update this article as we have further information and expand it more.

Key Information

We recommend looking at this site for the latest Government announcements on COVID-19.

Government support

The government has confirmed that this wage scheme and leave scheme apply to businesses (this includes registered charities, non-government organisations, incorporated societies and other entities). These groups can apply if they meet the qualification criteria. We found that this information was the best to refer to but this summary from Deloitte is helpful as well.

Contracts

Consider seeing what they say about “Force Majeure” events – things outside of your control – there may be provisions which help to delay provision of services or goods at this time. Is some renegotiation needed around the terms? Price? Timing?

Governance

We suggest this is a great chance to look back at your purposes and ensure that they are being followed. Why not also check policies and other rules? We also suggest you ask questions as a governing body to ensure that everyone understands the finances and budgets – how will they be affected? Finally, if you are making important decisions then record them in minutes of meetings. It may be that due to physical distancing you will need to adjust how you have meetings – we use Zoom.

Leases

If you have a commercial lease have a look and see if there is an “Emergencies” clause. If you have such a lease it depends what it says – so it is worth checking your agreement with the Landlord. If you have a recent ADLS version Deed of Lease (which is industry standard) then there is a definition of “Emergency” which includes an epidemic. Clause 27.5 then has provision about access to the property in an emergency – see the screen shot – that refers to “a fair proportion of the rent and outgoings shall cease to be payable…” in some circumstances where you are unable to access the premises as a consequence of the emergency. Use that clause as the basis to talk with your Landlord in the coming weeks.
As a side note, if you only ever signed an Agreement to Lease, don’t panic that it doesn’t have that clause, as the Deed of Lease provisions are deemed to be incorporated into the Agreement to Lease as well (if it is an ADLS form) – see clause 4 of the ADLS Agreement to Lease form.

Other issues

Here are some articles from our website that may be worth a look as well on the topics of good governance, electronic signatures, relief against forfeiture, employer issues, director duties and liquidations.

Questions?

This article is not a substitute for legal advice and you should consult your lawyer about your specific situation. For any questions, feel free to contact Steven Moe stevenmoe@parryfield.com or Kris Morrison krismorrison@parryfield.com

Several months ago we wrote an article on the key changes to the Overseas Investment Act coming into force later in the year (the article can be found here). The Overseas Investment Amendment Bill passed its third reading on Wednesday the 15th of August and received royal assent on Wednesday the 22nd of August. The changes are expected to come to effect in October 2018.

These are the key changes that you need to be aware of if you are a non-resident foreign buyer hoping to purchase property in New Zealand:

Scope of “sensitive land” to include “residential land”

The biggest change to the Overseas Investment Act is that the scope of “sensitive land” within the overseas investment regime is being broadened to include “residential land”. This is going to make it more difficult for overseas investors to purchase residential land in New Zealand, as they will need to apply for consent from the Overseas Investment Office which will require that the investment is going to, or is likely to, benefit New Zealand.

You will not need to apply for consent if you hold a residence class visa, have been living in New Zealand for at least 12 months, have been present in New Zealand for at least 183 days of those 12 months and are a New Zealand tax resident.

We have also published a more detailed article on the effect of this change, which can be accessed on our website here.

Forestry rights and interests:

The amendment will also impose stricter regulations on the purchase of forestry rights and interests, requiring the application for consent under one of two pathways – the “modified benefits test” or the “special benefits test”.

It should also be noted that it will be the obligation of the purchase to ensure that they are complying with the Overseas Investment Act.

If you would like to have a look at the Overseas Investment Amendment Bill, you can access it here.

If you have any questions or concerns arising out of this article, please feel free to get in touch. This article is not a substitute for legal advice and you should talk to your lawyer about your specific situation.

Kris Morrison krismorrison@parryfield.com

Paul Owens paulowens@parryfield.com

Consequential loss is a loss that arises as a result of a breach of contract. In contracts, parties often exclude liability for consequential loss which is provided for in an exclusion clause.

If you are entering into negotiations for a contract, it is important that you understand what consequential loss is, when damages can be claimed for consequential loss, and how to effectively exclude liability.

 

A question that arises when dealing with consequential loss is how far you can actually go in claiming damages for a consequential loss? Where do you draw the line?

Say, for example, that Mrs Smith has purchased a freezer for her catering business from Mr Jones, which she has filled with ice cream.  This ice cream is for a stall that she has been running at the local fair for a few years now, and is a favourite for many fair-goers. Unfortunately, the freezer broke the day before the fair causing all of the ice cream to melt and meaning that Mrs Smith cannot serve ice cream at her ice cream stall and would therefore not make any profit. The lack of ice cream at the stall meant that there were a lot of grumpy children, and grumpy children meant grumpy parents which resulted in a lot of backlash on the fair.

The following year, the fair suffered a 50% reduction in attendance as a direct result of the grumpy children and the lack of ice cream, and the organisers then had to cancel the fair in subsequent years and claimed the amounts they lost from poor Mrs Smith.

Mrs Smith now wants to sue Mr Jones in damages for the loss of profit and the amounts claimed by the fair organisers, which were losses resulting from the breaking of the freezer.  But how far can Mrs Jones actually go in claiming these damages?  Let’s look at some cases and see what they say.

Hadley v Baxendale

 

In an 1854 English Court of Exchequer decision Hadley v Baxendale, Alderson B famously established the remoteness test, which is a two-limb approach where the losses must be:

  1. Considered to have arisen naturally (according to the usual course of things); or
  2. Reasonably considered to have been in the contemplation of the parties at the time when they made the contract as a probable result of the breach of it.

Alderson B said that in order for a party to successfully claim damages on the grounds of consequential loss, the loss must fall into either of those two categories.

McElroy Milne v Commercial Electronics

 

In 1992 in New Zealand, Cooke P said this test no longer applied in modern law, and he established a multi-factorial discretionary approach in which a range of factors are to be taken into consideration, including foreseeability.

Transfield Shipping v Mercator Shipping (The Achilleas)

 

This is more recent English House of Lords decision concerning the late return of a ship. In this case, the judges established that while Hadley v Baxendale is generally a good approach, there are certain circumstances where it may not necessarily apply.

These judgments create confusion in determining what actually constitutes a consequential loss and where to draw the line.  Generally speaking, however, the loss must have been in the contemplation of the parties for it to amount to a consequential loss.

A way forward: What should the clause say?

 

In our view there are three ways forward:

  1. No exclusion of consequential loss – this means that the parties are leaving it up to the interpretation of the Courts;
  2. Include a general consequential loss clause; or
  3. Incorporate a bespoke clause for the specific contract.

Where possible, we recommend a general exclusion of consequential loss with some examples of specific situations (essentially a bit of both 2 and 3 above).

Other options available:

Remember that a contract is ultimately a give and take from each side and another way that a party can limit liability in a contract is by putting a total cap on their liability.

Another option is that a party could limit liability by stating a time period in which the other party can bring a claim. A small company negotiating with a large multinational will have less scope and a template agreement is much more difficult to get changes made to it.

Ultimately, whichever route is taken depends on the preference of the parties, and their negotiations will also play a role in determining what liability is excluded.

Every situation is unique and how much Mrs Smith could claim for will depend on what the contract said and the circumstances of the situation.  Whatever your scenario, we have a dedicated commercial team at Parry Field Lawyers who can give you personalised advice on all aspects of your business ventures.  This article is also based on a more detailed analysis of the cases mentioned above – contact us if you would like a free copy of that.

 

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Please contact Kris Morrison or Steven Moe at Parry Field Lawyers (348-8480).