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Overseas Investment Act Changes

02 February 2018 - By Thomas Gibbons

Shortly after the coalition government was announced, it declared that one of its priorities was to restrict the purchase of houses by overseas buyers. There was some general surprise when it was announced that this would be by amending the definition of sensitive land in the Overseas Investment Act 2005, as the Act is generally seen as being based on a consenting or permissions system, rather than on a system of complete prohibition. There was comment that there would be an exemption for new builds.

The Overseas Investment Amendment Bill received its first reading in Parliament on 19 December 2017. Submissions closed on 23 January 2017. This article outlines the key points in the bill, including the new restrictions on the acquisition of residential land by overseas persons, the three exemption tests, the expanded powers of the Overseas Investment Office (OIO), and the certificate of compliance that lawyers and conveyancers will be required to provide.

A street of houses in Wellington
Flickr user Flimin

Intention

The background notes to the bill record that its general intention is to ensure that persons not ordinarily resident in New Zealand are not able to purchase existing houses or other pieces of residential land. This will be achieved by treating properties that are classified as ‘residential’ or ‘lifestyle’ for rating valuation purposes as ‘residential land’, and so ‘sensitive land’ under schedule 1 of the Overseas Investment Act. Licences in flat or office-owning companies will also count as residential land. This ultimately puts some onus on territorial authorities to determine residential land though their district valuation rolls.

The definition of ‘ordinarily resident in New Zealand’ will also be amended – for the purposes of residential land purchases – to require a permanent resident’s visa, at least one-year’s residence in New Zealand, and presence in New Zealand for at least 183 days in the past year.

Overseas persons will be able to buy sensitive residential land in some circumstances – ie, where they meet one of three tests. These tests are outlined below.

Three tests: commitment, increased housing, and benefit

The first can be called the ‘commitment’ test: where the overseas person is a New Zealand citizen, ordinarily resident in New Zealand, or a qualifying individual meeting appropriate regulatory requirements. A qualifying individual must meet (or be likely to meet) stipulations relating to occupation as a main home, or on-sale within 12 months of a trigger event, which is to be defined by regulations. That is, the commitment test is partially a residency test, but also extends beyond that. See ss 16A-16B, within clause 11.

The second can be called the ‘increased housing’ test: that the overseas person can meet, or is likely to meet, increased housing and on-selling outcomes. Consent under this limb must include conditions requiring either increased residential use and on-sale, or construction/extension and operation of a ‘long-term accommodation facility’. A long-term accommodation facility is a retirement village, rest home, student, hostel, or similar operation, but not a hospital, hotel, motel, campground, or other operation excluded by regulations.

For these purposes, increased residential use and on-sale means that there is an increase in the number of residential dwellings on the land (including from zero), or construction/extension of a long-term accommodation facility, or development works that support these things. The phrase ‘development works’ is defined within the section, and includes provision of infrastructure or buildings, alteration, demolition, and preparatory site works, but does not include subdivision without other development works. The relevant land must also be sold within a specified period. The essence here is that residential land can be acquired for development, developed, and on-sold, without falling foul of the restrictions that apply to the purchase of an existing residential house. See ss 16C-16D, within clause 11.

The third can be called the ‘benefit’ test. This is based on existing legislative provisions, and has three parts: that the overseas investment will benefit New Zealand, as determined by the relevant Ministers under s 17; that in relation to non-urban land over five hectares, the benefit will be substantial and identifiable; and that in relation to residential land, the mandatory conditions will, or are likely to be, met. These conditions must relate to either increased residential use and on-sale, or construction/extension and operation of a long-term accommodation facility (as above); that the land will be sold in a specified period; or that the land will not be used for residential dwellings or a long term accommodation facility while held by the overseas person. See ss 16E-16F, with reference to s16D, all contained within clause 11.

The relevant test a person is seeking to rely on must be stated. A standing consent may also be granted, allowing a person to gain consent before a particular residential land transaction is contemplated, as long as certain conditions are met. Some automatic conditions of consent are stated, and the monitoring and investigatory powers of the OIA have been clarified. See clauses 13-18.

Overseas Investment Office Powers

Under the bill, the information gathering and enforcement powers of the OIO will also be expanded. Besides better powers to seek information under the revised s 41(1), new provisions relate to the effect of proceedings, the effect of a final decision relating to unlawful conduct, confidentiality, publication and disclosure. See ss 41A-41D, within clause 25.

More significantly, the OIO is given powers to dispose of land where there has been a contravention of the Act, an offence, or failure to comply with an exemption or condition. The Office may give a notice requiring disposition, with the Office’s grounds and reasons. The landowner may avoid liability by disposing of the property within the time specified in the notice, unless the landowner has provided false or misleading information. Others involved in a breach – the term ‘involved’ is defined – may also have liability, including civil penalties up to three times the quantifiable gain. See ss 41E-41F, within clause 26, and amendments to s 48 within clause 28.

Conveyancing certificate

Perhaps most controversial for lawyers is the requirement to provide a certificate under the new s 51A, contained in clause 31. Where a lawyer or registered conveyancer is providing conveyancing services to a person acquiring residential land, before the acquisition takes place, the lawyer or conveyancer must provide a certificate that, to the best of the lawyer’s or conveyancer’s knowledge, the completion of the transaction will not contravene the Act. This certificate must be kept for seven years. Failure to comply with this section is an offence, with a maximum penalty of $20,000. This places a significant onus on property lawyers, who are generally reliant on client instructions for information, and must now act as gatekeepers in respect of purchases by overseas persons.

Further changes

There are additional administrative matters, such as a requirement for a consent holder to provide an address for service, and keep this updated. Notices may be served on this address. See ss 54, 54A, 55 and 55A, within clause 32. Other provisions expand the power to make regulations, and insert a new schedule 1AA relating to transitional provisions.

Conclusion

The new government has moved fast in seeking greater regulation of overseas investment in New Zealand, particularly around purchases of existing residential housing. There are tightened requirements around residency, and new tests around commitment to New Zealand, provision of increasing housing, and benefits to New Zealand. The market remains open to overseas buyers who will develop and on-sell, while the Overseas Investment Office has greater policing powers.

While the regulator will have these powers, it is fair to say that lawyers will have greater policing responsibilities. These have not been sought: they have been imposed. They increase the compliance requirements and risks to lawyers involved in conveyancing transactions, even ones that would be otherwise straightforward. As such, the detail of the bill and its tests warrant close attention.

Thomas Gibbons (thomas.gibbons@mccawlewis.co.nz) is a director at Hamilton firm McCaw Lewis, and the author of A Practical Guide to the Land Transfer Act (LexisNexis NZ Ltd, 2018).

Last updated on the 2nd February 2018