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Regulatory Update – Overseas Investment Amendment Bill

Home Insights Regulatory Update – Overseas Investment Amendment Bill

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Contributed by: Catherine Marks and Anna Crosbie

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Published on: January 18, 2018

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Overseas Investment Amendment Bill: How it extends beyond residential housing and potential issues for submission

The Overseas Amendment Bill (Bill), currently before Parliament, is intended to give effect to the Government's commitment "to ban overseas speculators from buying existing houses". Submissions to the Select Committee close on 23 January 2018. The Government is fast-tracking the process in order to ensure that any changes are in place before the CPTPP trade agreement enters into force. Given the timeframes, it has not been possible for officials to consult with the private sector prior to introduction of the Bill or allow more time for submissions to the Select Committee.

We highlight below some potential issues where good arguments could be made for further modifications to the Bill. We understand that the Treasury and the Select Committee will be open to consideration of all issues and solutions (noting the key policy objectives will not change). Even short submissions could be useful. If an issue is accepted in principle, there may be further (limited) opportunity to provide additional examples or details.

The Bill amends the Overseas Investment Act 2005 (Act) by including residential property in the definition of sensitive land.1 Under the Act, in order to acquire sensitive land, overseas persons must demonstrate a net benefit to New Zealand.2 This test effectively excludes acquisitions by overseas persons of residential property for residential purposes. However, the Bill outlines the following circumstances where the net benefit test does not apply (simpler tests apply instead):

  • the overseas person acquires property to build additional houses for sale, they on-sell the land within a set time and do not occupy the land for residential purposes (referred to by the Treasury as the "new builds" test); or
  • the overseas person passes the "commitment to reside in New Zealand" test. 

The overseas person relying on these tests must still apply for consent, meet a good character/business acumen test and comply with mandatory conditions set out in the Bill. Standing consents will be available under both these tests.

As explained below, the proposed amendments in the Bill extend well beyond "overseas speculators" in residential housing, capturing commercial transactions where residential land is bought for non-residential purposes, as well as acquisitions of "long-term accommodation facilities" (such as retirement villages, rest homes and university accommodation). This will likely result in significant and unnecessary additional pressure being placed on Overseas Investment Office (OIO) resources, without supporting the policy objectives underlying the Bill (limiting overseas investment in residential property or supporting increased housing supply). 

Residential land bought for non-residential use: As drafted, there is no exemption from the net benefit test for overseas persons wishing to buy residential land for non-residential purposes (for example land to be used for the development of hotels, supermarkets and shopping complexes or other commercial purposes). Provisions for standing consents under the Bill (where an overseas person can obtain preapproval for a class of transaction) apply only where the new builds test or commitment to reside in New Zealand test are relied on. That means that overseas purchasers buying residential land for non-residential purposes must satisfy the net benefits test under the Act which can be a lengthy and expensive process.3 They will also be required to apply for consent for each and every transaction.

It is arguable that these types of commercial transactions should be exempt from the Bill. Alternatively, a simpler test or the good character/business acumen test only could apply (which would mean a simpler and faster application process). A standing consent could also be available for these types of transaction. Any issues around change of use (from residential to commercial) are arguably better addressed through existing resource management processes with input from the local community.

Overseas persons purchasing residential land to accommodate power, water or communications infrastructure would face specific challenges because it would be difficult to ever satisfy the net benefit test factors. Accordingly, there are strong arguments that infrastructure providers should be excluded from the scope of the Bill, where land is acquired for infrastructure purposes.

Long-term accommodation facilities: The simpler "new build" test applies to the acquisition of existing "long-term accommodation facilities" but only where the purchaser proposes to construct new accommodation or increase the number of dwellings. This means sales or leases of already built facilities, where increasing the extent of the accommodation units is not possible or commercially feasible, will have to obtain full OIO consent and satisfy the net benefit test with associated cost, delay and uncertainty. There also appear to be drafting issues with the mandatory conditions (which may be in error – they effectively rule out acquiring a pre-existing long-term accommodation facility without meeting the additional build requirement even where the net benefits test is met). Again, it is arguable that long-term facilities should be exempt or the good character/business acumen test only should apply.

From a developer's perspective: The Bill will inevitably have time and cost implications for developers, whether overseas persons or not, who develop residential land for sale and will need to factor the new regime into their sales programmes. As drafted the Bill provides that conveyancing practitioners acting for residential purchasers (whether they are overseas persons or not) must provide a certificate confirming the purchaser will not breach the Act by giving effect to the transaction. Not only will this compliance requirement increase conveyancing costs for all residential land purchasers (including New Zealanders) and require involvement of solicitors much earlier in the conveyancing process than is usual practice – it is unclear who can rely on that certificate or request a copy. For example, while a vendor has no obligation under the Bill to obtain or sight a certificate before a sale is completed (the obligation is on the purchaser and their conveyancer), the new very broad offence provisions could nevertheless capture vendors if no certificate is obtained. Without clarification, this risks uncertainty and inefficient (over) compliance.

Please do not hesitate to contact one of our team below if you have any further questions.

FOOTNOTES
  1. Currently consent is only required for land that is non-urban and exceeds 5 hectares (or falls within one of the other sensitive land categories eg foreshore or seabed). "Residential land" is defined as property falling within the "residential" and "lifestyle" property categories in the Rating Valuation Rules which reflect the highest and best use, rather than actual use, of the land. An interest includes any legal or equitable interest irrespective of size. Easements are exempt from the operation of the Act as are various other interests outlined in the Regulations (covering, for example, mortgages).
  2. New Zealand and Australian citizens and those ordinarily resident in New Zealand will still be able to purchase residential property in New Zealand.
  3. Under the Act, a net benefit test applies to sensitive land transactions. Benefits are assessed with reference to 28 different factors (such as creating job opportunities, increasing exports, protecting areas of significant habitat among other things). Benefits must be over and above the counterfactual (usually what a New Zealand purchaser would do). A purchaser must also meet a business acumen/good character test. The average timeframe for assessing an application including the net benefit test is currently 150 days or longer, although well drafted applications with strong benefit claims can progress faster than this.

 


This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.

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