The Fire and Emergency New Zealand Act 2017 (the Act), which came into force earlier this year, has the potential to have significant financial implications for commercial property owners, and their tenants.

The Act replaces the Fire Services Act 1975 and the Forrest & Rural Fire Act 1975. It has been designed to ensure NZ has a modern, fit for purpose, and well funded fire service that addresses long standing issues such as under funding of rural fire.

The Act established Fire and Emergency New Zealand (FENZ) on 1 July 2017, bringing together around 40 urban and rural fire fighting services to deliver one comprehensive national emergency service.

However, under new funding structures proposed in the Act, the commercial property sector looks set to contribute more than its share of FENZ's funding requirements.

The warm up: A 40% hike in Fire Levies

FENZ will be funded almost entirely by a levy on insurance. Under the new regime FENZ requires additional funding to absorb rural fire costs and to cover new ongoing operating costs addressing things such as gaps in rural fire services, support for local communities and volunteers, and transition costs.

To help fund those additional and ongoing costs, on 1 July 2017 levies on property were increased by approximately 40%, from $7.60 to $10.60 per $100 of insured value, although the levy on residential owners is capped at $100,000 of insured value, or $106 per property. There is no cap on non-residential levies. Levies on motor-vehicles increased to a flat rate of $8.45 (from $6.08).

The increased levy, together with other measures that are set to come into effect from 1 July 2018, seem to place a disproportionate funding burden on the commercial property sector relative to its usage of fire and emergency services.

To illustrate this further, consider the following:

  • A 2014 report identified that fire and emergency personnel spent 24% of their time attending commercial building emergencies - yet it has been estimated non-residential owners will contribute around 60% of FENZ funding, of which commercial building owners make up a significant portion.
  • Property Council New Zealand (Property Council) obtained statistics regarding the 10 year average of fire service responses indicating that commercial properties made up just over 15% of all responses.
  • Commercial building owners often spend significant money on fire and emergency prevention systems and procedures – meaning they are often at a lower risk of requiring FENZ services.
  • Rural and forestry responses are likely to require significantly greater responses in terms of cost and time than a well equipped commercial building - for example, consider the cost of supplying helicopters, monsoon buckets, and the prolonged assistance and services of fire fighting teams to fight a rural fire.

While the levy will be charged to building owners via the insurance they buy, that cost will inevitably be passed on to their tenants under net lease arrangements, resulting in increased outgoings and, potentially, issues of affordability for tenants.

More heat to come: Further changes by 1 July 2019

The new funding arrangements under the Act are being phased in, with further changes to come into force by 1 July 2019, following consultation on such things as:

  • Changing the way the levy is assessed by assessing on material damage insurance rather than fire only insurance. This will have the effect of enlarging the levy base and further increasing the share of FENZ costs funded by the commercial property sector.
  • Applying different rates of levy to residential and non-residential property. Currently the rates are the same, save for the cap that applies to residential.
  • Increasing the cap on the residential levy to reflect changes in property values.

Consultation is being carried out at present. Following recommendations to Cabinet, the changes could come into force as early as 1 July 2018, and will come into force on 1 July 2019 if they have not been brought into force before that date.

A burnt offering: Mixed use owners hardest hit

One of the most significant financial impacts of the new levy structure could be on owners of mixed use residential-commercial properties.

They will face an increase in the value of their property for fire levy purposes as compared to the old regime where, because of the definition of residential property based on the EQC Act, the non-residential portion of their property was not subject to levy.

Under the new regime the levy will be payable on each household unit (up to the cap) and on the non-residential portion of the amount insured at the non-residential rate, with no cap.

Is there still time to douse the flame?

With the effect of 40% increase in fire levies that kicked in at 1 July 2017, and other changes to come into effect from 1 July 2018, such as assessing the levy on material damage insurance rather than fire only insurance, with no cap for non-residential, the commercial property sector stands to subsidise, significantly, the cost and use of fire and emergency services in New Zealand.

However, while FENZ continues to consult on aspects of the funding structure that are yet to come into force, an opportunity still remains to influence the final outcome of the effect of new levies on the commercial property sector.

In that regard, it is worth noting that two of the key principles of the Act are to provide for levies that are:

  • universal, so that FENZ's costs are shared among all who benefit from their services; and
  • equitable, so that policy holders should pay a levy at a level commensurate with their use and the risks of the activities they carry out.

It certainly seems questionable whether the principles of universality and equity are being met under the new funding structure!

We note that the Property Council, which represents the interests of its member commercial property owners, has already made submissions to the relevant authorities on what it considered significant cross-subsidisation by the commercial property sector, and ahead of the introduction of the remaining aspects of the levy structure on 1 July 2018, is continuing to seek changes to the levy structure to dampen the effect of the new legislation on the commercial property sector.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.