Law reform on the run… but the Government is listening
The Overseas Investment Amendment Bill (Bill) was reported back by the Select Committee on 19 June 2018. Changes to the Bill are substantive, likely due to the lack of consultation before the Bill was first introduced. In effect, consultation that would usually happen early in the policy process has been undertaken at the Select Committee stage. While this process is not ideal, the amended Bill addresses a number of the issues raised by submitters, at least to some extent.
In brief, the Bill as reported back:
- Relaxes the restrictions on overseas buyers investing in housing developments.
- Includes a new streamlined test for overseas investors purchasing residential property for non-residential purposes or for purposes to support a residential business. It will also be possible to apply for a standing consent in these circumstances so that one consent can be used for multiple transactions. This is a significant change. In the Bill as introduced an overseas investor would have had to satisfy the full net benefit test every time it acquired residential land for non-residential purposes and without the option of applying for a standing consent.
- Includes specific exemptions for: (i) utility companies purchasing residential land for utility purposes; and (ii) overseas investors purchasing hotel units.
- Broadens and clarifies the powers to grant exemptions.
- Extends the lease term from three years to five years (no consent is required for leases less than five years).
- Extends the pool of ordinary residents.
These are discussed further below. We will issue a separate alert on the changes to the Supplementary Order Paper dealing with forestry rights and forestry land.
Issues with the Bill as introduced
To recap, the Bill amends the Overseas Investment Act 2005 (Act) by including residential property in the definition of sensitive land. Under the Act, in order to acquire sensitive land, overseas persons must demonstrate a net benefit to New Zealand. This test effectively excludes acquisitions by overseas persons of residential property for residential purposes. The Bill as originally drafted outlined the following circumstances where the net benefit test did not apply (simpler tests applied instead):
- The overseas person acquires property to build additional houses for sale provided they on-sell the land within a set time and do not occupy the land for residential purposes (increased housing 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 were available under both these tests.
Key issues identified with the Bill as introduced were:
(a) the failure to exempt or provide a streamlined test for residential land bought for non-residential purposes (for example land to be used for the development of hotels, supermarkets and shopping complexes);
(b) the simpler tests only applied to long-term accommodation facilities (such as rest homes) where the purchaser proposed to construct new accommodation or increase the number of dwellings – so did not cover sales or leases of already built facilities, where adding to the accommodation units was not possible or commercially feasible; and
(c) cost and time implications of requirements that conveyancers providing certificates so that the purchaser would not breach the Act.
These issues have been addressed to varying extents as explained below.
This alert summarises the amended increased housing test and the amended exemption powers.
Key amendments to the Bill as reported back
(a) Purchasing residential land for non-residential purposes/for purposes to support the business
There is a new simple test for transactions in which residential land is used for non-residential purposes (non-residential use test) or to support a business (incidental residential use test). Provided the overseas investor satisfies two criteria, consent will be granted without any need to demonstrate a broader benefit to New Zealand or against any counterfactual. If the criteria are meet, the OIO/Minister's discretion is relatively constrained meaning the process should be considerably more certain.
Further, an overseas investor who is likely to frequently purchase residential land for non-residential purposes can apply for a standing consent and then effectively self-assess and report to the OIO without having to apply on each occasion.
The non-residential use test criteria
The criteria are as follows – that the residential land will be or is likely to be used or continued to be used (clause 13 in Schedule 2 of the Bill):
- for non-residential purposes in the ordinary course of business for the relevant business; and
- not used, or held for future use, for any residential purposes.
Sufficient information will need to be provided to enable the Minister to be satisfied of the outcomes above. Provision is made to deal with land where only part of the land will be used for non-residential purposes (if the remaining land is going to be on sold). Specific conditions must be included in the consent reflecting the non-residential test criteria (clause 13) and the non-occupation outcome (clause 17) – see clause 18. The non-occupation outcome simply requires that the overseas person/its associates do not occupy the land.
If the Minister is not satisfied the non-residential test is met, the Minster can grant consent on the basis of the incidental resident test or the non-occupation outcome.
The incidental residential test criteria
The criteria are as follows – that the residential land will be or is likely to be used or continued to be used for residential purposes (clause 14 in Schedule 2 of the Bill);
- but only in support of the relevant business, where the relevant business is not (or is only exceptionally) in the business of using land for residential purposes; and
- the residential land will be or is likely to be acquired in the ordinary course of business of the relevant overseas person.
This test addresses concerns that residential uses such as accommodation for staff will be unnecessarily caught by the Bill. When considering whether to grant consent, the Minister is required to consider:
- whether any reasonable alternative exists to the acquisition of the relevant interest in the residential land;
- the proximity of the residential land to the premises or operations of the relevant business;
- whether the use of the residential land for residential purposes is (without limitation) as accommodation for staff engaged in the relevant business; and
- any other factors that seem to the relevant Ministers to be relevant in the circumstances.
Conditions must be included in the consent that reflect the incidental residential test (clause 18). Again a standing consent will be available where one consent can be applied for to enable multiple transactions. As with the non-residential use test, there is provision for addressing situations where only part of the land will be used for incidental purposes.
(b) Long-term accommodation facilities
Issues with long-term accommodation facilities have not been expressly addressed. This means an overseas person buying, say, a rest home, would need to demonstrate additional accommodation would be built in order for the simpler increased housing test to apply. This means that, if it is not possible to increase the numbers of dwellings, it will be necessary to satisfy the usual net benefit test. The amended Bill has clarified that the non-occupation and on-sale outcomes do not apply to long-term facilities (they would apply to other housing developments).
(c) Cost and time implications associated with conveyancing certification
The Select Committee decided the burden placed on conveyancing practitioners was too high so the Bill has been amended to place the burden on the purchaser. The purchaser now has to provide the conveyancer with a statement as to whether the transaction requires consent under the Act. The conveyancer simply has to obtain and keep the statement.
Increased housing test
The amended Bill has relaxed some of the criteria relating to the increased housing test but way of exemption certificates (that must be applied for). This in intended to better ensure overseas investors invest in housing developments. In particular:
- developers of multi-storey apartment buildings with 20 or more units can apply to the Minister for an exemption certificate to sell a percentage of the residential dwellings to overseas buyers without the need for OIO consent (new sch 3, cl 4). Where an exemption certificate is granted, it must have conditions that impose a non-occupation outcome on purchasers who rely on an exemption certificate and allow the regulator to monitor non-occupation by the purchaser;
- the percentage of dwellings available for sale to overseas buyers will be set in regulations – the indication is that the initial percentage will be 60%;
- there is an exemption to the requirement for dwellings to be on-sold upon construction for overseas persons who buy a dwelling in a building with 20 or more residential dwellings where the dwellings are maintained as rental properties, owned under a shared equity arrangement or sold under a rent-to-buy model.
Exemption for utility companies and hotels
Utility companies will be exempt from the residential land requirements provided they purchase land for utility purposes. The exemption applies to electricity and gas distributors, telecommunication companies, and transmission network operators. Because of the shortage of hotel accommodation, there is also an exemption for the purchase of hotels with more than 20 units provided they enter into a leaseback arrangement with the hotel operator or developer.
Amended exemption powers
Finally, the Select Committee report acknowledges the Act has broad coverage in order to address avoidance and loopholes. This also means that exemptions play a key role in ensuring the Act does not have unintended consequences and/or imposes compliance requirements which are "impractical, inefficient and unduly burdensome". These comments indicate that exemptions should be more widely used.
There are currently two ways to obtain exemptions:
(a) to make an individual application for an exemption; or
(b) to have an exemption included in regulations (which can apply to any transaction, person, asset, interest or right or any class of the foregoing).
The amended Bill brings both processes into the Act.
Importantly, the amended Bill sets out criteria that the Minister will consider when granting an exemption. As a starting point, exemptions may be granted where there are circumstances that mean that it is "necessary, appropriate, desirable to provide an exemption from the provisions of this Act" and the extent of the exemption is not broader than is reasonably necessary to address those circumstances.
Specific criteria the Minister must consider for both individual exemptions or exemptions in the regulations include considerations such as:
- the extent to which effective ownership or control is changed by the overseas investment or remains with persons who are not overseas persons;
- the extent to which a sensitive asset is already held in overseas ownership or control;
- the extent to which the acquisition is the result of the operation of other legislation or an event outside the control of the overseas person;
- the extent of time an overseas person is likely to have ownership or control of a right or an interest, for what purpose, and the likely impact on the sensitive asset of that overseas ownership or control; and
- any other factors that seem to the Minister to be relevant.
This article 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.