Overseas Investment Act 2005 – 2018 changes in practice
The most substantial change to the Act was to provide that all residential land is now considered sensitive land. Because of New Zealand’s free trade agreements with Australia and Singapore, Australians and Singaporeans (for the most part) are exempt from these changes. However, other overseas persons are restricted from purchasing residential land in New Zealand.
The optimal time to deal with the issue of whether or not a purchaser is entitled to purchase residential land is at the start of the sale and purchase process. The standard ADLS agreement for sale and purchase of real estate has an Overseas Investment Act condition which if selected will make the purchase conditional upon the approval of the Overseas Investment Office (“OIO”). Whether or not the agreement should be conditional upon OIO approval should always be considered when drawing up a sale and purchase agreement. We are also seeing provisions being inserted into agreements where purchasers give a warranty that they are entitled to purchase residential land under New Zealand law. A provision such as this is designed to ensure that the vendor (and/or agent) cannot be held liable by the OIO for assisting in giving effect to an overseas investment without approval (which can attract substantial penalties).
Another stage at which a property transaction can become subject to the Act is if the purchaser (who was entitled to purchase residential land) nominates an overseas person to complete the purchase. This is a potential pitfall with the new restrictions of the Act, particularly where the agreement is unconditional. With a company, a relatively small shareholding (25%) by an offshore person is sufficient to render the company an overseas person (and therefore requiring OIO approval). The ability to control the board of a company could also be sufficient to render a company an overseas person. With trusts, if it’s governing body is 25% or more owned or controlled by an overseas person, or an overseas person has a beneficial interest in or entitlement to 25% of a trust’s property, the trust will be an overseas person and a purchase of residential land would require OIO approval. Care should therefore be taken when considering whether or not to nominate, as a nomination could bring an unconditional transaction into the Act’s net.
Finally, before registering a transfer, lawyers and conveyancers are required to obtain and hold statements from purchasers which confirm the purchaser’s entitlement to purchase residential land in New Zealand. This is the final safeguard in the transfer process for ensuring that persons or entities do not inadvertently purchase residential land when not entitled to do so. However, there is the potential for these statements to not be signed until after the agreement has become unconditional. If this happens, the purchasers are unconditionally obliged to settle, and the only real option available to prevent breaching the provisions of the Act is to default under the agreement, which could result in serious consequences for both vendor and purchaser.
When the changes to the Act are combined with a number of other relatively recent changes, including anti money laundering provisions and tax information requirements, property transactions are becoming much more closely monitored, and lawyers and conveyancers are required to work much more closely with their clients. When considering whether to purchase land, whether residential or otherwise, it is always a good idea to discuss the terms of any potential agreement with your lawyer first.