June 2010

Restructuring

Options to consider

With the continuing effects of the economic downturn ‘kicking in’, interest rates on the increase, commentators predicting a flat property market, and following changes in the budget, another wave of individuals may be contemplating downsizing, debt reduction or disposing. The purpose of this article is to highlight in a brief and general way some of the legal issues to be mindful of.

Debt Reduction

Debt reduction raises further issues that may need to be considered.

• The cost of breaking fixed interest rate repayments may be significant.
• The lender may not be prepared to accept repayment of a particular loan on a property sale and may require all sale funds to be repaid. The lender also may not be willing to co-operate in the release of a security such as partial discharges of mortgages of land or the release of personal guarantees.
• New criteria may be imposed on the re-draw of funds.

Disposing of Assets

For commercial property dispositions there are a number of issues to consider. These may include:

• The GST status of the transaction and whether GST is payable or not.
• The ‘associated persons’ rules, affecting dealers and developers, that impact on tax gains that would otherwise escape the tax net.
• Commercial tenants may be looking to change premises not only to reduce costs but as a result of lease inducements, incentives (such as rent free periods) or lease surrender payments. This raises issues as to whether they are deductible expenses or not. The tax treatment for each party will depend on how the deal is structured and the tax profile of each party.

For sale of both residential and commercial property you may have to pay tax on depreciation previously claimed but recovered on sale.
Often in fixing up one problem by a disposal you can create another. For example, the transfer of a leaky property to a trust or company amounts to a change of ownership. While this may have estate planning benefits for the transferor, it will prejudice any claim the trust has in regard to the leaky problem as it will break the causative link against those responsible for the problem including the territorial authority. Acquiring the property with knowledge of the leak may also amount to contributory negligence on the part of the purchaser reducing all or part of a potential claim. If the transferor has already lodged a claim with the Weathertight Homes Tribunal this must be terminated.

With some projects put on hold due to the downturn, it is important to check that Council Resource Consents are still valid. A resource consent will lapse on the date specified in the consent unless it is implemented or an application is made to the consent authority to extend the lapse period. In some instances, such as water and discharge consents, these will need to be transferred (e.g. if you are disposing of a beach property).

Sometimes restructuring may involve a change of building use (e.g. disposing of flats to a company that operates serviced apartments) that may require notice of a change of use to the territorial authority.

Downsizing

This may be achieved by closure of branches and not renewing some leases of premises, plant and vehicles. You should be mindful of the fact that most rental agreements do not permit the lessee to break the lease until the end of the term. Therefore, if renewing a lease or rental agreement negotiate a shorter term to give yourself flexibility.

If reducing staff be mindful of the strict procedures which must be followed when making staff redundant. Unless procedures are followed you could find yourself or your business faced with a personal grievance claim. An alternative may be to adopt a policy of non-replacement of staff who leave and adopting use of temps or contractors to cover periods of urgent need.

For further guidance on these issues, do not hesitate to contact us.