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Property Law Act 2007. What has changed?

The Property Law Act 2007 came into force on 1 January 2008.  This is the first review of our property legislation since 1952.  Gerard Kilpatrick, a partner in the Warkworth Lawlink firm of Webster Malcolm & Kilpatrick, looks at some of the practical implications. 

The Property Law Act 2007 is the most recent Parliamentary enactment to bring the ancient law of property into a format intended to suit modern times.  In the first part of the Act, technicalities in our property law that no longer serve any purpose are deleted or modified, and in some instances, new laws are inserted in their place.  In this article, we look at some of the changes, and how these changes may affect the way in which landlords, tenants and others who deal with property need to approach property related issues.  We also look briefly at some of the uncertainties created by the new Act.

Deeds

At common law (ie law developed by the courts and not enacted or ratified by act of Parliament), to be effective, a deed needed to be signed, sealed by the person signing, and delivered, usually to another party to the deed, with an intention to be bound by its contents.  This gave rise to the expression “signed, sealed and delivered”.  Many formal acts are done by deed – for example a power of attorney is made and a lease is created in this way.  Land transfer instruments, such as a mortgage, also have the status of deeds pending their registration under the Land Transfer Act 1952.

The Property Law Act 1952, now repealed by the new Act, provided that formal delivery of a deed was not necessary for its effectiveness, but this new Act requires that for a deed to be effective, it must be “delivered” by the party making it.  This is common sense, as because of the 1952 Act provision, lawyers were forced to create or adapt other principles of law (eg the common law doctrine of escrow, or execution subject to a condition) to prevent a deed taking immediate effect.  Most of us have signed transfers in our lawyer’s office when we have sold our house – but understand that the transfer takes no effect until our lawyer hands it over to the buyer in return for payment of the sale price.  In future, that handing over will technically constitute a “delivery”.  The common law tells us that delivery need not be a physical handing over, but that any act or even a circumstance evidencing an intention to be bound will be sufficient.

This change just brings the law in line with practice and common sense, but it remains to be seen what practices will now develop.  Will there need to be an endorsement on the deed recording the fact and circumstances of delivery, or will that in most instances be left to be presumed?  We will need to wait and see how practice develops.

Another provision of the Act that brings the law of deeds in line with practice and common sense is the recognition of the ability to state an “effective date” – that is the date or circumstance on which the deed is intended to have effect.  In the future, lawyers should consider whether there needs to be such a statement in the body of the deed.  Again, it remains to be seen what practices will develop.

Leases

One change of consequence is more precise recognition of a short-term lease as a “legal” lease.  This gives the tenant under a lease for one year or less certain priorities over other persons who may also have some interest in the land.  The Act provides that the rights of the tenant under a short-term lease will prevail over other interests created before the short-term lease was created.  For the holder of a short-term lease to benefit from these priorities it is necessary that the holder of the other interest has not caveated the title at the time the tenant entered into possession.  Under the Act the rights of the short-term tenant will also prevail against the holder of a contrary interest created after the lessee has entered into occupation – this may appear obvious, but without this provision, at least in some cases the holder of the later interest could have secured priority over the interests of an earlier tenant simply by lodging a caveat prior to any caveat by those other interests.  A short-term tenant does not obtain priority over other interests protected by the Land Transfer Act 1952.  The object of these provisions appears to be to ensure that the short-term tenant is not prejudiced by the informality that often accompanies short-term tenancy arrangements.

Another change is that previously a tenant’s covenant (or promise) in a lease to keep the premises in good condition required the tenant to bring the premises up to good (or “as new”) condition – even if the premises were not in good condition at the commencement of the lease.  Now, under section 223 of the new Act, a tenant who gives this covenant is not required to put the premises in good condition if they were not in good condition at the commencement of the lease.  Oddly, the Act says this rule applies unless the “context otherwise requires”.  It would have been clearer had the Act said “unless the contrary is expressed...”.  Most leases (including the Auckland District Law Society form) will also expressly except “fair wear and tear” from the tenant’s maintenance obligation.  Although not totally clear from the Act, it seems that unless otherwise expressly provided a tenant’s covenant to keep the premises in “good condition” will be satisfied by restoring the premises to the condition they were in at the commencement of the lease – an obligation which will usually be further modified by either the implied covenant in the Act or by the lease instrument itself, both of which except “fair wear and tear”. 

Distraint and Forfeiture

Previously, commercial landlords had a right to “distrain” against a tenant’s property situated on the tenanted premises – in some cases even if that property was under charge to, say, a financial institution.  This was an ancient right, based on the common law and upon ancient statutes as well as our (now repealed) Distress and Replevin Act 1908. 

In recent years, the right has been little used and in some circumstances has been abolished, but the mere fact that it was there constituted a warning to tenants to place the payment of rent, which is a fundamental business obligation, ahead of obligations to other creditors.  It remains to be seen how the final abolition of this right will affect the behaviour of landlords and tenants.  Will landlords now look to include a charging provision over the tenant’s property in their standard lease conditions? 

Similarly, under the previous law, landlords had a right to immediate forfeiture of the lease for unpaid rent – although this right was often modified by the lease by prescribing a time period before which the right could be exercised.  For example, the Auckland District Law Society form of lease gives the tenant 14 days before a right of forfeiture arose, but without the need for any written notice on the part of the landlord. 

The new Act provides that the landlord’s right to forfeit the lease arises after ten working days have elapsed – although the prescribed period in the Act is a trap for landlords, as the implied covenant in the schedule to the Act extends this period to 15 working days.  The result is that unless the specific lease form provides otherwise, the period that must elapse is not the ten working days specified in the Act, but the 15 working days set out in the implied covenant in the schedule.

(The Auckland District Law Society lease expressly negatives the implied covenant, reducing this period to the statutory minimum of ten working days.)  In addition, before actually cancelling a lease, landlords must serve a notice of intention to cancel (drawn strictly in terms of the Act), which allows the tenant a minimum of ten working days to pay the overdue rent.  The notice can be issued and served immediately following the default, and the time periods for both the default and the notice can run together.

With the new Act’s final abolition of the right to distrain, the right to forfeit the lease for non-payment of rent is likely to become more important, with landlords moving quickly to issue the necessary notice once the tenant is in arrears.  Landlords should note that the right to forfeit is, in practical terms, a security for payment of the rent.  By way of explanation, a tenant is entitled to “relief against forfeiture” from the High Court – that is, if the landlord forfeits or attempts to forfeit the lease the High Court can grant the tenant relief.  Provided the tenant is not otherwise in default under the lease, relief is almost always given if the outstanding rent is paid.  Effectively, this turns the right of forfeiture for non-payment into a mere security for the rent.

Working Days

The Act follows other recent legislation and some standard common form documents in prescribing periods of time for the expiry of notices to be given in “working days”, that is, the notice becomes effective after so many “working days” have elapsed.  Previously some notices had to specify an actual date to be valid.

For example, a default notice under a mortgage now needs to specify “20 working days” instead of an actual date as previously.  This is unfortunate, as the working days formula does not inform the borrower of exactly when a power of sale under a mortgage becomes exercisable.  As the courts have pointed out (Sharp v Amen, [1965] NZLR 760) other persons, such as subsequent mortgagees, also
receive the notice, and will not know from the copy exactly when it was served on the borrower.  Further, lawyers are well familiar with clients who have not noted exactly when a document was served on them.  As a result, they may have difficulty finding out exactly how much time they have to take action to protect their client.  It is unfortunate that this protection for borrowers, who may not be sophisticated in commercial matters, has been removed on such an important matter.

The definition is, in fact, faulty, in that if New Year’s Day and the day after New Year’s Day (public holidays) are transferred to another day, the definition requires those days to be counted as “working days”, resulting in a trap for the unwary.  The Auckland District Law Society form of lease also adopts this “working day” definition, thus further extending the area in which confusion may arise.

Other Enactments

Section 8 of the Act says:

If a provision of this Act is inconsistent with a provision of another enactment, the provision in the other enactment prevails.

With respect to those who draft our statutes, this is a most unusual provision.  There are well settled rules of statutory interpretation to deal with any conflict that may arise between enactments.  Only time will tell exactly what this provision means – the new Act covers much that is also prescribed by other enactments, eg “working day” definitions, execution of documents and the like.  Because the definition of “working day” differs from the definition of “working day” in the Interpretation Act 1999, does this mean we adopt the definition in the Interpretation Act 1999?  Without this provision in section 8, the answer would be no.  With this provision the answer is uncertain.  Unfortunately, an element of totally unnecessary uncertainty is introduced.

Conclusion

There is, of course, much more that the Act says, but this article attempts to set out the principal areas of strategic importance to those dealing with land.  The article does not cover the detail, which can be looked up as required.

Always consult your Lawlink lawyer when dealing with property related issues, particularly while the new provisions settle down.

Summary

1.    We have a new but important Act, the Property Law Act 2007.  Much of the content is technical, however time limits and the form of many notices have changed.  Care and good legal advice is required.

2.    The final abolition of the landlord’s right to distrain is an important change in the balance of rights between landlord and tenant, and as a result the landlord’s right to forfeit the lease for non-payment is now likely to be of greater significance than previously.

3.    The Act raises other legal issues that will need to be worked through in time.

© Webster Malcolm & Kilpatrick
Email g.kilpatrick@wmklaw.co.nz
Website www.wmklaw.co.nz

 

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