Tag Archives: Edward Bostock

Expanding your business? Proceed carefully …

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It’s great to see Hawke’s Bay’s economy steaming ahead and to notice lots of positive signs that our business environment is thriving.As your business improves and demand increases you may be thinking about expanding by hiring new staff.

Before you start making offers however there have been a number of changes to employment law recently that you need to be aware of.

Change to 90 day trial period

The most important change if you’re thinking of new hires is to the 90 day trial period. From 6 May 2019 businesses that have 20 or more employees are no longer able to include a 90 day trial period in their employment agreements.

This means that if you are a larger business and employ 20 or more employees then you will no longer have a “get out of jail free card” for dismissing new employees that aren’t working out. You will need to revisit your employment agreements to remove trial period provisions. I recommend that you include comprehensive probationary period provisions instead – these would still allow you to dismiss an employee at the end of a probationary period provided that you follow a fair process and have a fair reason for dismissal. Unlike the 90 day trial period provisions however your employee will be entitled to bring a personal grievance if you haven’t followed due process.

If your number of employees fluctuates around the 20 mark then you will need to ensure that you are aware of exactly how many employees you have as at the date an employment contract including trial provisions is signed. If the business employs 20 or more employees at that date then you will not be able to utilise the trial period provisions if you later decide it is necessary to dismiss your new employee.

Smaller business can still use trial periods
Smaller businesses with less than 20 employees can continue to use trial periods, but you should be aware that any flaw in either the wording of the provision or in the way the contract was signed will mean that you can’t rely on the trial period when dismissing an employee. For a trial provision to be valid the employee must have had a chance to review and seek advice regarding their employment agreement before signing it, and the agreement must be signed prior to the first day of employment.

Be careful if you’re considering dismissal of an employee
I recommend that any employer considering terminating a worker’s employment using a 90 day trial provision, or in fact dismissing an employee for any reason, seek legal advice before doing so, as you may not be entitled to do so if you have not followed the right process, no matter how obvious it might seem to you that a dismissal is justified. Mistakes in process can be costly, so it is better to make sure you get it right.

Other changes to employment law

Along with the changes to the trial period there have also been a raft of other changes introduced, some of which took effect from December 2018, and the rest of which will be effective from 6 May 2019. These include changes to union access and collective bargaining processes and a greater emphasis on reinstatement if employees have been unfairly dismissed. The protections around restructuring for vulnerable workers have been expanded so that employers with less than 20 employees are no longer exempt.

Rest and meal breaks

Another change is to employees’ rights to set rest and meal breaks. Currently employees are simply entitled to ‘reasonable breaks’ and there are no specific rules for when or how long such breaks should be. The new law sets out the number and duration of breaks which employees are entitled to in relation to how many hours they have worked. This is actually a roll back to the pre-2015 position so many employers and employees won’t notice a significant difference if they hadn’t made any changes to breaks since then. I recommend that employment agreements include specific rest and meal break times that suit your business, as if this isn’t agreed then the default timing for breaks will apply.

Review your employment agreements
The changes I’ve mentioned are not an exhaustive list of the amendments to the Employment Relations Act. This article is only intended to give a general overview and alert you to the fact there have been changes. I recommend that all employers regularly review their employment agreements and better yet that you seek legal advice to make sure that your agreements are fit for purpose and fully comply with current legislation.

 

Franchising – what’s in the fine print?

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Despite being prevalent throughout New Zealand, there is no legislation that governs or regulates franchises, with the result that there is no requirement for the terms of a franchise to be fair and reasonable.

What is a Franchise?

Every franchise should be a replica of the Franchisor’s business, therefore giving customers of the franchise a consistent experience.

The Franchisee gains the benefit of the franchise’s reputation, goodwill and intellectual property instead of having to develop this from scratch.  A franchise business will often cost more to purchase than an equivalent independent business – the theory is that a Franchisee pays a higher up-front fee and pays on-going costs, in exchange for lower economic risk.

In general, a franchise involves:

  • A Franchisor
    • granting a Franchisee the rights to use its intellectual property and systems;
    • providing training, know-how, ongoing marketing, business or technical assistance.
  • A Franchisee
    • establishing and operating a business selling the Franchisor’s products or services;
    • being required to follow the Franchisor’s systems, procedures and instructions;
    • paying fees (royalties) to the Franchisor;

Franchise Agreement

The Franchise Agreement regulates the business operation and the franchise relationship.  The relationship is contractual and encompasses multiple areas of law such as taxation and intellectual property.

Franchise Agreements are invariably long and complex documents that favour the Franchisor and, to protect the integrity of the franchise, Franchisees will not be able to negotiate changes to it.   Some say that all Franchise Agreements are unfair, unreasonable and one-sided when considering the balance of rights and obligations – an easily missed word or clause can have a significant ongoing impact through the term of the franchise.

It therefore follows that extra care and attention must be given prior to entering into a franchise.

It is important to separate out the “sales pitch” from the nitty gritty of the Franchise Agreement.  The “sales pitch” will focus on the benefits etc. however the benefits are only one aspect of the arrangement – what is most important is understanding what it really means to be part of the franchise which can only be uncovered by considering the Franchise Agreement in detail.

During due diligence a prospective Franchisee should obtain focussed advice on the terms and implications of the Franchise Agreement.  If you are not fully informed as to the details or you do not appreciate the significance of a provision then you may be disappointed, disheartened and ultimately suffer losses as a consequence.

Fees, Levies or Royalty Payments

As part of the franchise arrangement, the Franchisee would typically be required to pay a number of fees:

  • An initial (lump sum) franchise fee to compensate the Franchisor for development costs and as a licence fee;
  • On-going service or royalty payments for the on-going:
    • use of the system and trade name;
    • support and assistance of the Franchisor.
  • An advertising or marketing levy (an advantage of the system is that a Franchisee obtains the benefit of the franchise’s advertising albeit that the Franchisor chooses how to advertise or market the franchise).

Other terms to consider

  1. The length of the initial term;
  2. If and how the franchise can be renewed and the fees associated with a renewal;
  3. The territory in which the franchise will operate and any rights to exclusivity in that territory;
  4. How the franchise can be terminated and obligations on termination; and
  5. Restraint of trade.

Franchise Association of New Zealand

While there is no government regulatory body for franchises, the Franchise Association of New Zealand (FANZ) is involved throughout the country and sets standards for best practice among its members.

Franchisors that are members of FANZ are required to follow its Code of Practice, which should reassure potential Franchisees that the Franchisor is serious and has undertaken to practise in a fair and reasonable manner.

By way of an example, FANZ requires its members to:

  • publish a disclosure document to maximise the information available to prospective Franchisees, so that they can make a sound business decision whether or not to proceed
  • insist that each Franchisee has independent legal and accounting advice
  • use agreements that contain a minimum of a 7-day cooling off period.

 

Co-ownership agreements

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You should always protect your investments as best you can and your entry into a new business venture is no different.

Any new business always starts with good intentions and hope for a positive outcome. However, no matter how strong the bond between you and your business partner(s), every relationship goes through its ups and downs and you should try to agree on the fundamentals of your current and ongoing business relationship, in case the relationship breaks down.

Types of Agreement

These can come in any number of forms such as a Shareholders’ Agreement (for limited liability companies), a Partnership Agreement or a Joint Venture Agreement.

Given that most businesses operate as limited liability companies, Shareholders’ Agreements are most commonly seen. We will therefore, for ease, focus on these – albeit that the matters that can or should be covered in a Shareholders’ Agreement are relevant to other forms of Co-Ownership Agreements.

What is a Shareholders’ Agreement?

Ultimately it is a private agreement between the shareholders as to how they will run the company although it is a very flexible document and can be used to cover any matters that the shareholders wish.

Without a Shareholders’ Agreement, the shareholders might not have a say over company matters if the directors (and company itself) are complying with the Companies Act and the Company’s Constitution (if it has one).

As mentioned above a key aspect of a Shareholders’ Agreement is that it is a private document, between the Shareholders and the Company, and not available to be viewed by others, unlike the Company’s Constitution, which is a public document and registered on the Companies Office website.

While it is preferable for a Shareholders’ Agreement to be signed on or before the incorporation of a company it can be entered into at any time.

Why should you have a Shareholders’ Agreement

Some benefits of having a Shareholder’s Agreement include:

• dealing with matters decided prior to incorporation unlike the constitution, which will only take effect from date of incorporation;

• removing misconceptions as to the scope and purpose of the business;

• detailing provisions which require unanimity to be altered – a constitution can be changed by 75% of the shareholders and therefore could be changed without the agreement of a minority shareholder.

What should be included in the Shareholders’ Agreement?

A Shareholders’ Agreement is flexible and can include anything that the Shareholders consider relevant. There are common topics, which we would recommend are considered for inclusion, as follows:

1. The purpose of the business and how it will be run by the shareholders;

2. The number of directors and who has the right to appoint or remove them;

3. The roles and responsibilities of the shareholders;

4. What decisions require shareholder approval (and the level of said approval e.g. unanimous);

5. How funding will be arranged and secured (including shareholder loans);

6. How shares can be transferred or sold – e.g. pre-emptive rights;

7. How shares are to be valued and if the valuation alters depending on the circumstances;

8. How and under what circumstances can a shareholder or director be removed;

9. Restraint of trade and non-competition provisions

10. Dividend policy;

11. Dispute Resolution and Deadlock provisions – i.e. what happens when shareholders cannot agree or a dispute cannot be resolved.

Areas of common contention relate to how a shareholder can exit the company and resolving disputes.

Exit Strategy

We would recommend that focus be given to this issue as it is important for a shareholder to understand (prior to entering the company) when and how they may be able to exit the company and on what terms.

By way of an example an agreement can outline a minimum amount of time that a shareholder must remain part of the company and the exit process itself (e.g. notice requirements and share valuations).

Disputes and deadlocks

While shareholders might hope to always be able to reach an agreement with each other, disputes are common. If there is no Shareholders’ Agreement the process of resolving such disputes can be messy, expensive and extremely disruptive to the day-to-day operation of the company.

Deadlocks occur when shareholders holding equal voting rights are unable to agree. In such circumstances it is important to set out how such a deadlock will be resolved to ensure that the company can quickly move forward.

Negotiation of agreement

The act of negotiating a Shareholders’ Agreement (or other form of co-ownership agreement) is an important and useful process to undertake with your prospective shareholders/business partners as you will need to discuss and try to agree on what will happen if a certain event arises.

This will assist in the process of getting to know each other and ultimately will help establish that you can actually work together.

Have You Got the Right Lease?

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It is probably fair to say that most small businesses do not own their own premises and, in such situations, it is necessary to “lease” premises.

An Agreement to Lease (ATL) is usually the preliminary document, prepared by a commercial real estate agent, that contains the basic information agreed on by the Landlord and Tenant.

The formal Deed of Lease replaces the ATL and is usually prepared in accordance with the terms and conditions contained in the ATL.

Agreement to Lease

As mentioned above, this is the precursor to the Deed of Lease and generally only contains the basic information. However, it is important to ensure that the Agreement covers the following elements:

  • A clearly defined description of the premises;
  • The term of the Lease;
  • The dates of the Lease or how they will be calculated:
    • Commencement date;
    • Any renewal dates;
    • Rent review dates; and
    • Final expiry date.

• What rights of renewal the Tenant has;

• How rent will be reviewed (e.g. market rent review or CPI rent review);

  • Annual rent;
  • Details of the outgoings:
    • What outgoings are charged;
    • Estimated cost; and
    • Whether cost included or in addition to the rental.
  • The agreed business use;
  • Type of insurance for the building held by the Landlord;
  • All Landlords fixtures, fittings, and chattels.

It is important to note that the ATL is a binding contract between the Landlord and a prospective Tenant and while it is only intended to be a temporary document until a full “Deed of Lease” is executed, the ATL will provide that the parties will be bound by the provisions of the Deed of Lease as if it had been signed.

Considering this, it is very important that a Tenant not only be aware of and be advised on the terms of the ATL but also the Deed of Lease prior to signing the ATL. For example, the Landlord may require (where a company is to be the tenant) for individuals to be personal guarantors of the Lease. It is essential that the parties to the Lease, including the proposed personal guarantors, are aware of the implications of the guarantee and how, as an example, it is treated on assignment of the Lease by the Tenant.

Deed of Lease

This replaces the ATL and is prepared based on the information contained in the ATL.

What is contained in the Deed of Lease will vary, however it should contain all the main details set out in the ATL (such as listed above), and you would also expect the Deed of Lease to include details of:

  • Responsibility for legal costs in relation to the Lease and future documents required;
  • Tenant’s obligations as to maintenance and care of premises;
  • Landlord’s responsibility for maintenance;
  • Signage – does the Landlord need to consent to Tenant’s signage?
  • Reinstatement of premises on termination of Lease;
  • Assignment of the Lease;
  • Damage or destruction of premises;
  • Premise condition report.

Can you rely on an Agreement to Lease alone?
While it is not uncommon for a tenancy to commence prior to the Deed of Lease being executed, we would advise that it be signed prior to the Tenant taking possession of the premises.

Given that the ATL binds the parties to the terms of the Deed of Lease, it is workable for the tenancy to be bound by the ATL however there are circumstances where the Deed of Lease will be required, such as:

  • Finance arrangements – whether you are a Landlord or a Tenant, your bank may require a copy of the Deed of Lease prior to agreeing to advance funds;
  • To confirm dates –where an ATL contained provisions as to how dates will be calculated, the Deed of Lease will record the confirmed dates;
  • Sale of premises– if the Landlord wishes to sell the premises, the Deed of Lease will be required.
  • Assignment of Lease – if the Tenant wishes to assign the Lease then again, the Deed of Lease will be required.

Expect the best, plan for the worst and prepare to be surprised

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It is important for every business to have formal Terms of Trade. When comparing large businesses to small, it’s fair to say the larger the business the more likely it will have written Terms of Trade.

While there may be some who have operated for a substantial amount of time without written Terms of Trade and have never had cause to require them, every business should “expect the best, plan for the worst and prepare to be surprised.”

Terms of Trade should set out the conditions and agreements that the business and the customer have made at the commencement of a transaction including the obligations of the business and the customer (if any). This benefits both the business and the customer – the customer enters the relationship with realistic expectations and the business has defined the standards it intends to meet.

Benefits

Well drafted Terms of Trade should assist a business in resolving issues with a customer. For example, the terms can help a business to collect debts, should the need arise, and should also specify:

  • How the price will be determined (if a quote is not given);
  • When and how payment is to be made;
  • Consequence of non-payment, such as penalty interest on unpaid amounts and the ability for the business to recover its costs in collecting the debt from the customer.By recording these matters at the outset, the customer cannot refute them or argue that they do not apply, or they did not agree to them.Tailor-madeWhile it’s possible to download a template form of Terms of Trade, it is advisable for each business to tailor their Terms of Trade to their specific circumstances and requirements.For example, the question of liability should be included in Terms of Trade and “one size” may not fit all. The question of liability will first be dependent on whether it is a “business to business” or a “business to consumer” sale.

Business to Business

The Consumer Guarantees Act 1993 (CGA) will not apply and it is therefore important to specify the businesses potential liability and the extent that liability is to be excluded. For example, a business may wish to exclude liability for losses suffered by a customer that could not be reasonably foreseen. A business may also wish to limit its liability to a specified dollar amount or to exclude liability completely.

Business to Consumer

The CGA will apply where a business (acting in trade) supplies goods or services to a consumer. Where the CGA applies various warranties will automatically be implied into the contract between the business and the customer. Importantly a business cannot contract out of the CGA when dealing with a consumer.

Notwithstanding that the CGA may apply a business may still want to limit its liability for example for “indirect” or “unforeseen losses”. However, if a business does this it must then be determined whether the Terms of Trade are considered a “standard form consumer contract” and whether any of the terms are “unfair contract terms”.

Acceptance of Terms

It is important to be able to evidence that a customer accepted the Terms of Trade. A business may have well drafted Terms of Trade that provide them with all the protections required however this will be of no use if it is unable to show that the customer had agreed to the terms.

For example, a business that prints its terms on the back of an invoice may have difficulty proving that the customer accepted them. The obvious issue here is that a customer may claim that the first time they saw the terms was on receipt of the invoice, after the transaction had essentially been completed and may argue therefore that they never accepted the terms.

Where a business provides quotes, good practice would be to specify that accepting the quote constitutes acceptance of the businesses Terms of Trade, which should be provided with the quote.

The obvious way to evidence acceptance of the Terms of Trade would be to have the customer physically sign those terms prior to commencing work. It is accepted however that this may not always be appropriate however emailed confirmation from the customer accepting the Terms of Trade would also suffice.