New Zealand
Giving or taking guarantees
To be valid, a guarantee needs to be in writing, signed by the guarantor and provided for good consideration.
Consideration for a guarantee is subject to general contractual principles. In the case of a guarantee, the underlying obligations will usually be the consideration for the guarantee and so it is advisable to execute the guarantee at the same time as executing the underlying obligations to avoid any suggestion of past consideration. Often the guarantee is included in the loan agreement and so this should not be an issue. Also it can be difficult to establish consideration for a guarantee as the primary obligations are between the underlying obligor and beneficiary, for example between the borrower and lender. As a result, guarantees are often executed as deeds to avoid any argument about whether good consideration was provided. Deeds have particular execution requirements under New Zealand law which need to be observed.
Additionally, there is a risk that a guarantee may be set aside if it was procured by undue influence by a borrower or lender. A party being provided with a guarantee should be alive to this issue and take steps to avoid claims of undue influence by, for example, requiring the guarantor to take separate legal advice.
Lender responsibility principles exist when taking guarantees. Failure to abide by these could result in issues for the guarantor. Every creditor that takes a guarantee of a consumer credit contract has disclosure obligations to the guarantor as part of this obligation.
Giving or taking security
A security document may need to be executed as a deed if it:
- contains a mortgage over land;
- confers a statutory power of sale and power to appoint a receiver; or
- contains a power of attorney.
Once granted, security needs to be properly perfected before it is valid against third parties. Perfection formalities can range from having the secured asset delivered to the security holder, registration of the security and notice being given to third parties. Mortgages over land are registered on on-line electronic land titles register - Land Information New Zealand, also known as LINZ. Security interests over non-land assets are protected by registering a finance statement on the New Zealand Personal Property Securities Register.
There are no general notarization requirements for security documents under New Zealand law.
Like guarantees, for a period after a new security interest has been granted (known as the hardening period), it is at risk of being set aside in certain circumstances under insolvency laws. Reviewable transactions include those conducted at an undervalue and preferences and invalid floating charges.
Are there any restrictions on lending and borrowing?
Lending
Yes.
The Credit Contracts and Consumer Finance Act 2003 places restrictions on advertising content related to consumer loans. The Responsible Lending Code imposes on lenders of consumer finance and credit contracts obligations to abide by when issuing loans.
Financial institutions do not have to be registered banks in order to take deposits and make loans.
Banks may face restrictions on residential home loan lending due to Loan to Value Ratio (LVR) restrictions imposed via bank registration conditions. These restrict banks on the amount of low deposit lending they can do. Note that this only applies to residential investment and would exclude commercial transactions.
Borrowing
When borrowing money secured over residential homes by mortgage, certain LVR restrictions exist. These restrictions specify the minimum deposit requirements when buying an owner-occupied property to live in or when buying residential investment property. Certain exceptions do apply.
Non-bank deposit takers must comply with the Non-Bank Deposit Takers Act 2013.
What are common lending structures?
Lending in New Zealand can be structured in a number of different ways to include a variety of features depending on the commercial needs of the parties.
A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility).
Syndicated facilities by their nature involve more parties (such as agents and trustees which fulfil certain roles for the finance parties), are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicate taking the lead in coordinating and arranging the financing.
Loans will be structured to achieve specific objectives, e.g. term loans, working capital loans, equity bridge facilities, project facilities and letter of credit facilities etc.
Loan durations
The duration of a loan can also vary between:
- a term loan, provided for an agreed period of time but with a short availability period;
- a revolving loan, provided for an agreed period of time with an availability period that extends nearer to maturity of the loan and which may be redrawn if repaid;
- an overdraft, provided on a short-term basis to solve short-term cash flow issues; or
- a standby or a bridging loan, intended to be used in exceptional circumstances when other forms of finance are unavailable and often attracting a higher margin.
Loan security
A loan can either be secured, unsecured or guaranteed or limited resource. For more information, see Giving and taking guarantees and security.
Loan commitment
A loan can also be:
- committed, meaning that the lender is obliged to provide the loan if certain conditions are fulfilled; or
- uncommitted, meaning that the lender has discretion whether or not to provide the loan.
Loan repayment
A loan can also be repayable on demand, on an amortizing basis (in instalments over the life of the loan) or scheduled (usually meaning the loan is repayable in full at maturity).
What are the differences between lending to institutional / professional or other borrowers?
Lending to institutional/professional borrowers is subject to less regulatory oversight and therefore is less burdensome from a compliance perspective.
Lender Responsibility Principles will only apply to consumer credit contracts (except for consumer leases). Subject to this, parties are generally free to contract on their own terms and conditions subject to restrictions which apply generally (for example in relation to penalties, and oppressive conduct).
Do the laws recognize the principles of agency and trusts?
Yes, both principles are recognized as a matter of New Zealand law.
For instance, it is possible to appoint an agent to act on behalf of other parties and a trustee to hold rights and other assets on trust for the lenders or secured parties.
Are there any other notable risks or issues around lending?
Generally
Loan agreements and other finance documents are subject to general contractual principles. There are few general risks or issues particular to lending transactions (such as usury laws or similar), beyond these risks which generally arise in other jurisdictions.
There is a renewed focus on conduct with new standards being imposed on financial service providers to ensure that they serve the needs of customers, treat customers fairly, recognise and prioritise customer interests and effectively manage conflicts of interest. The FMA is expecting this to be actively monitored and managed by boards and senior management with legislation implementing new conduct licensing regime expected to be introduced in Parliament by the end of 2019.
Specific types of lending
Loan-to-value ratios limit New Zealand banks on the amount of low-deposit residential mortgage lending. Banks and other institutions must abide by prudent lending standards.
Standard form documentation
Banks and other consumer finance providers typically use their own standard form loan agreements and security documents for transactions under NZD2 million, and often for larger transactions also.
Are there any other notable risks or issues around borrowing?
A range of legislative protections and standards exist in relation to consumer finance transactions, or transactions with individuals (as distinct from companies, trusts or other entities), such as those under the Credit Contracts and Consumer Finance Act 2003, Fair Trading Act 1986 and the Consumer Guarantees Act 1993.
Michael Thompson
Partner
DLA Piper New Zealand
[email protected]
T +64 9 300 3866
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