New Zealand’s Specialist
Project Lawyers

Media have rightly focused on the reduced frequency of rental increases and changes to the termination of periodic tenancies, with these provisions being substantially amended for the first time in over 30 years.

Most residential property landlords will only be able to terminate a periodic tenancy:
 

• by giving 63 day’s notice if the owner of the premises, or a member of the owner’s family (which includes extended family and whānau), requires the premises as their principal place of residence within 90 days after the termination date; or

• by giving 90 day’s notice, but only for certain specified reasons. The list of reasons for terminating a tenancy is narrow, and the “no cause” ground has been removed.

Tenants will need to give at least 28 days’ notice to terminate a periodic tenancy – up from 21 days.

A late change was made to allow tenants to withdraw from a fixed-term or periodic tenancy on 2 days’ notice in circumstances of family violence. Any remaining tenants are then able to apply to the Tenancy Tribunal to be released from the tenancy on hardship grounds. A landlord who is physically assaulted by a tenant can terminate the tenancy by giving 14 days’ notice, but only if a charge is laid against the tenant for that assault.

Rent may not be increased within 12 months after the start date of the tenancy or 12 months after the last increase took effect. This applies even if the tenancy agreement (including for a fixed term tenancy) provides otherwise. As with the current Act, rent cannot exceed the market rent and cannot be charged more than 2 weeks in advance.

In addition:
 

• landlords must allow tenants to undertake minor changes to the property (such as hanging pictures and redecorating), subject to certain conditions and provided that the changes do not require a building consent;

• landlords must facilitate the installation of fibre connections to a property, although not if the installation will materially compromise the weathertightness, character or structural integrity of a building;

• landlords must include the rent when advertising properties, and cannot hold auctions or solicit bids;

• fixed-term tenancy agreements will automatically become periodic tenancies on expiry, unless both parties agree otherwise or in limited other situations;

• to evict a tenant for anti-social behaviour (being harassment and activities causing non-minor alarm, distress or nuisance), the landlord will need to warn the tenant (in writing) at least 3 times in a 90 day period of that behaviour before seeking a Tenancy Tribunal order;

• all tenancies (except social housing tenancies where the tenancy agreement prohibits assignment) are assignable with the prior written consent of the landlord, and that consent cannot be unreasonably withheld; and

• financial penalties are increased, generally by 50% or more, but with significant additional penalties potentially imposed where a landlord has 6 or more tenancies.

The amendments also strengthen the Residential Tenancies (Healthy Homes Standards) Regulations 2019 (which set “healthy homes standards” for heating, insulation, ventilation, draughtiness, moisture ingress and drainage) by requiring that landlords retain information about compliance with the healthy home standards and provide that information to tenants on request.

The changes largely result from a public consultation process undertaken by the Ministry of Business, Innovation and Employment in 2018, and driven by the Government’s desire to make life better for tenants in light of home ownership being at a 60 year low and the number of rented properties exceeding 600,000. The changes therefore increase the rights of tenants, and reflect that tenants will often occupy rental accommodation for many years.

We advise a range of social housing and residential property investors on the acquisition, management and disposal of properties. If you would like further advice on the changes to the Residential Tenancies Act 1986, please contact our real estate and property team.

The purpose of the Act (and the end to which its powers are to be deployed) is to facilitate urban development that contributes to sustainable, inclusive and thriving communities. The primary “beneficiary” of the Act is Kāinga Ora—Homes and Communities (Kāinga Ora), the Crown entity established in 2019 with the objective of contributing to sustainable, inclusive and thriving communities through, amongst other things, initiating, facilitating or undertaking urban development. 

Powers given to Kāinga Ora

The Act provides Kāinga Ora with a “tool-kit” of statutory powers, a number of which are, in effect, modified versions of existing development powers currently available to local government. Included in this “tool-kit” are powers relating to the planning and consenting of urban development projects, land acquisition, infrastructure development powers, and funding mechanisms.

Most powers apply only to “specified development projects”, but some powers also apply to any urban development project initiated, facilitated or undertaken by Kāinga Ora. For example, Kāinga Ora is empowered to acquire land for any urban development project.

“Specified development projects”

The establishment of a “specified development project” allows Kāinga Ora to access the full suite of statutory powers to facilitate complex development projects. 

The process for establishing a specified development project under the Act can be initiated by either Kāinga Ora or the Ministers of Urban Development and Finance (acting jointly). In either case, Kāinga Ora must engage with; Māori entities with an interest in the project area, hapū associated with any former Māori land in the project area, and with key stakeholders including local authorities, Heritage New Zealand Pouhere Taonga and the operators of affected infrastructure. Kāinga Ora must also invite public feedback on the key features of the project. 

The Ministers may accept the recommendation that the project be established as a specified development project where it meets identified criteria, including whether the project objectives are consistent with the purpose of the Act and the national directions under the Resource Management Act 1991.

Kāinga Ora must then prepare and seek public submissions on a draft development plan for the project. The submissions on the draft development plan are reviewed by an independent hearings panel, which then recommends to the Minister for Urban Development whether to approve or amend the draft development plan.

Powers relating to “specified development projects”

Once the development plan takes effect:
 

• Kāinga Ora becomes the “consent authority” for resource consent applications in the project area;

• only designations that have been identified in the development plan have effect in the project area.Kāinga Ora then becomes the territorial authority for the purpose of considering notices of requirement lodged by other requiring authorities;

• certain statutory powers relating to reserves, conservation interests, infrastructure and funding mechanisms may be exercised to further the project;

• existing planning instruments under the Resource Management Act 1981 may be amended, overridden or suspended by the development plan. 

Comment

The Act is a key feature in the suite of Government-led initiatives designed to support the creation and delivery of well-functioning urban environments. While the tools available to Kāinga Ora under this Act are powerful, the process for accessing them provides ample opportunity for Ministerial decision-making and therefore judicial oversight. These consultative and decision-making requirements are likely to (appropriately or otherwise) limit the number of projects that will be suitable candidates for progression under the Act. However, for projects facing significant barriers, the Act can offer a comprehensive pathway to facilitate their development where they will contribute to sustainable, inclusive and thriving communities. Navigating the different stages of decision-making under the Act will require considerable skill and strategic nous.

For any questions on the Act and/or the COVID-19 Recovery (Fast-track Consenting) Act 2020, and how these alternative processes might be used or impact developments, please don’t hesitate to contact Lauren Semple, Francelle Lupis or Jeannie Warnock.

The issues on appeal involved an examination of the scope of the current rule against penalties in New Zealand and whether the clause in question constituted an unenforceable penalty.

Upholding the Court of Appeal finding, the Supreme Court has usefully re-stated the law on penalties in New Zealand.

Background

Honey Bees runs a childcare centre in central city premises leased from 127 Hobson. When the Deed of Lease was entered into, the parties also entered into a separate agreement under which 127 Hobson and its director agreed to install a second lift in the building to facilitate the arrival and departure of children at the central city high rise preschool.

This agreement included a provision whereby both 127 Hobson and its director agreed that in the event this second lift was not operational by 31 July 2016, Honey Bees would be indemnified against all rent and outgoings it incurred under the lease until its expiry.

The Supreme Court looked at the circumstances around entry into the overall transaction, examining why the separate second lift agreement was central to the lease’s suitability.

What is the scope of the rule against penalties in New Zealand?

The Supreme Court summarised the rule against penalties as follows:
 

• A clause will be an unenforceable penalty if a consequence is out of all proportion (exorbitant) to the legitimate interests of the innocent party in performance of the primary obligations.

• Determining if the clause is an unenforceable penalty requires an objective exercise of construction, undertaken at the time of contract formation, and by reference to the terms and circumstances of the contract (including commercial context).

• A legitimate interest to be weighed includes any consequences designed to protect the interests of the party in performance of the primary contractual term.

• A party’s legitimate interests may extend beyond the loss caused by the breach as would be measured by a conventional assessment of contractual damages, i.e. the four corners of the contract.

• Legitimate interests will not include objectives unrelated to the performance interest – including punishment – but deterring a breach can be a legitimate objective of the clause.

• The respective bargaining power of the parties is relevant, including whether legal advice was obtained.

• It is not always necessary for the court to assess damages – but there will be cases where such a monetary calculation will be the appropriate measure of the innocent party’s interest in performance.

Was the indemnity clause an unenforceable penalty?

To answer this, the Court looked at Honey Bees’ legitimate interests and found that the only relevant interests were those that flowed from a failure to install a second lift on or before the due date. As the preschool was operating on the fifth floor of a busy high rise building, children and parents would be arriving and leaving within concentrated blocks of time. Honey Bees was looking to increase the capacity of its preschool over the forthcoming years. This was important to the commercial success of the venture.

The Court also found that there was no discrepancy in the parties’ respective bargaining powers.

The Court agreed with the Court of Appeal’s finding that, despite the ‘all or nothing’ nature of the indemnity clause, the consequences of the indemnity being triggered were not out of all proportion to the legitimate interests secured, and therefore the clause was not an unenforceable penalty.

Other issues

This Court also read the wording “all obligations” as applying to only “payment obligations”, i.e. Honey Bees was indemnified against all its financial obligations under the lease but the agreement did not give Honey Bees a right to breach its own obligations under the lease.

It is worth noting that the Court confirmed the general understanding in property law that rights of renewal of leases are in fact grants of a new lease, not an extension of the existing lease. Therefore the indemnity provided under the indemnity agreement only applied to the initial term of the lease, rather than a 24 year period including all renewals.
 
10 July 2020

The manner in which the temporary notification regime applies to property transactions and how a change of control is calculated has now been clarified by the Overseas Investment Amendment Regulations 2020 (Regulations). In addition, the Overseas Investment Office (OIO) has recently published details of what information is required when making a notification to it and provided some additional guidance.

When is notification requirement triggered?

One of the key things achieved by the Regulations is to clarify when various property transactions require notification to the OIO.

The Urgent Measures Act provides in section 82(2)(b), that, an acquisition of property by an overseas person used in carrying on business in New Zealand that effectively amounts to a change in control of that business, as defined in the Regulations, is subject to the temporary notification regime. The Regulations define what is meant by a change in control of the business, and here take a novel approach. Change in control is to be assessed by reference to what proportion of the counterparty’s (i.e. the vendor’s or lessor’s) total assets are being acquired. A “change in control in relation to the acquisition of property used in carrying on a business” is where the value of the property being acquired is more than 25% of the value of all New Zealand property owned by the person from whom the property was acquired, as assessed immediately before the acquisition. If this threshold is exceeded, the transaction must be notified.

This means that both the purchase of land, as well as the entry into a lease (being an acquisition of an interest in land), will be subject to the temporary notification regime and require notification to the OIO if they involve more than 25% of the counterparty’s total assets.

The value of property is to be determined by reference to the most recent financial statements, accounting records and all other circumstances which affect the value of the property. Reliance may be placed on valuations that are reasonable in the circumstances.

Further, value is to be determined by reference to the assets of the actual counterparty, not its related companies. If a particular property asset is held in a special purpose vehicle, as is often the case, regard cannot be had to the total value of group assets.

It is quite possible that a counterparty will resist having to provide its confidential financial information. If so, one solution would be to include a warranty that the threshold is or is not met, and if need be, proceed, or not proceed, to notification accordingly. The OIO has indicated it will be providing further guidance here shortly.

Incorporating companies

One thing to watch out for in relation to the application of the notification regime to business transactions generally is that it covers any acquisition of securities by an overseas person. Strictly speaking, this covers even the uncontroversial incorporation of a New Zealand subsidiary of the overseas person, without even any business transaction occurring. We expect the OIO to issue some further guidance on this, as it has agreed that a simple company incorporation should not be covered.

A few process comments

If it is determined that a transaction is subject to the temporary notification regime, notification to the OIO is to be made prior to giving effect to a transaction. A transaction may be entered into before notification, provided the transaction is conditional on receiving a direction order from the Minister. Transactions entered into before 16 June 2020 are not subject to the temporary notification regime at all.

The notification process is completed online via an online form on the OIO’s website. The information required includes:
 

• details of the overseas investor (including an ownership structure diagram);

• copies of the passport identity page for each individual director or trustee of the acquiring entity or individual involved in the transaction;

• details of the transaction;

• details of the business being invested in or the interest being acquired;

• the value of the assets or interest being acquired; and

• financial statements for the previous two financial years.

This information must be submitted with the online form and cannot be sent separately to the OIO. No fee is payable.

Unless the OIO makes appropriate changes to its online form, the process for completing it will remain clunky. All the information needs to be gathered, and ready for upload as required, in advance. No provision has been made for the counterparty to submit its financial information privately, on a confidential basis. There is no ability to provide additional material (for example a statement that the counterparty refuses to provide financial statements, or a letter explaining any necessary departure) and there is a tick-box requirement that the party submitting confirms that all required information has been included in the notification (without which the online submission will not work).

Once a transaction has been notified, the OIO will conduct an initial review and make a recommendation to the Minister of Finance, who will decide whether the transaction is contrary to the national interest. No delegation of this decision-making power has been made, regardless of transaction value, and if all parties comply then it is possible to foresee a bottleneck arising at the ministerial level. This initial review is expected to be completed within 10 working days, although the legislation does actually provide for the initial review to take up to 40 working days, with provision for extension by the Minister for a further 30 working days.

A notified transaction cannot progress until a direction order is issued. The Minister may:
 

• make a direction order that no conditions are imposed (and therefore the transaction may proceed);

• make a direction order imposing conditions on the transaction; or

• make an order prohibiting the transaction from being given effect.

If it is found that further assessment is necessary, the transaction will be subject to a detailed review against the national interest test. This is a discretionary power, and guidance on this test notes that considerations are to be given to a range of factors and the likely impact of the investment.

The OIO expects the majority of transactions to be able to proceed without any intervention. However, as the notification requirement effectively amounts to a temporary ministerial power of veto over transactions, at the very least resulting in potentially significant delay, the new regime is of concern to business.

Thankfully the new emergency notification regime is only temporary and an assessment of the regime is to commence by the end of July to ensure that classes of transactions subject to the regime are not broader than reasonably necessary. Further, the emergency notification regime will be reviewed by the Minster at 90 day intervals to ascertain whether the effects of the pandemic justify the regime remaining in place. Where it is determined, the emergency notification regime is no longer required, this will be replaced by a permanent call-in power (see our previous article here for details of this).

Please contact Brigid McArthur or one of our lawyers in our Property team if you would like help on interpreting the temporary notification regime and the recent changes to the Overseas Investment Act.

10 July 2020

In Aztek Limited v Attorney-General [2020] NZCA 249, the Court of Appeal held that, even though the company former owner had been removed from the companies register, the chief executive of Land Information New Zealand (LINZ) should have enquired into the ability to make an offer to that company. The chief executive’s decision, made in February 2011, that it would have been “impracticable” to sell the land to that company was set aside and the chief executive is now required to reconsider that decision.

The case relates to properties acquired from Aztek Limited for the “Avondale Extension” (later known as the Waterview tunnel project) by agreement in 2005. As Aztek’s only significant asset was that land, the directors of the company had ceased filing annual returns and the company was removed from the companies register in March 2009. In November 2010, NZTA decided that the land was no longer required for the Avondale Extension and, on 21 February 2011, the chief executive of LINZ approved an offer-back exemption under section 40(2)(a) of the PWA. This section provides an exemption to the standard rule that land must be offered for sale to its former owner when it would be “impracticable” to do so. The reason given was that the company had been removed from the companies register.

Aztek was restored to the companies register in 2015 after the directors of the company discovered that the land had been declared surplus. The restoration of the company, in effect, brought it back to life as if it was never removed from the companies register.

The Court of Appeal relied on both the wording and purpose of section 40 of the PWA to decide that the chief executive of LINZ should have enquired with the shareholder of the company as to whether it was possible for the company to be restored to the companies register in order to receive an offer of the land. That enquiry should have been made between the decision that the land was surplus and the decision that a sale to the former owner was “impracticable”. In this case, those decisions were made at the same time.

The Court relied on a number of previous decisions about the rights of former owners under the PWA and concluded that the PWA is designed to ensure that, so far as practicable, land is returned to the persons from whom it was acquired as “that is the right thing to do”. The Court held that, in this case, it was both reasonable and practicable to advise the shareholder of the company of the possibility of receiving an offer if the company was restored to the companies register.

This was a case where the company was closely-held, and the company had been removed from the companies register less than two years before the land became surplus. The reasonable performance of the chief executive’s duties could have resulted in the company being restored to the register in order to receive an offer in the months following the November 2011 decision that the land was surplus.

Restoration to the register is a relatively straightforward process under sections 328 to 331 of the Companies Act 1993 where the relevant ground for removal did not exist (generally, that the company had ceased to carry on business) and a useful provision in a variety of scenarios, both inside and outside of a liquidation.

The PWA remains a complex piece of legislation, which is well overdue for reform, with the rights and obligations of landowners and governmental agencies becoming more and more governed by caselaw. In this particular case, it is not yet known if an appeal to the Supreme Court will be sought by the Crown.

A number of our lawyers regularly provide advice on the PWA and one of our senior consultants, John Greenwood, advised Aztek and its shareholder on this matter. If you would like further information about this or any other PWA matter, please contact one of our property lawyers. Our corporate team can also assist with restoration to the companies register or other company law matter.

For the 11 “listed projects” contained within the Bill itself, the pathway is relatively clear. These projects are already on the fast track and almost (we think!) assured of consent with the expert consenting panel apparently only having to satisfy itself that the grant of consent or designation is not inconsistent with any national policy statement (including a New Zealand coastal policy statement) or Treaty settlement legislation and then determining what conditions should attach. The expectation in the Bill appears to be that these projects will be consented in short order, subject to the relevant applicant completing the necessary applications. The Bill sets out some reasonably hefty requirements for those applications, but how that will translate into practice remains to be seen.
 
For roading and rail projects, KiwiRail and NZTA obtain some limited permitted works powers in respect of existing public infrastructure works (subject to specific performance standards included in the Bill), with local councils being given a monitoring role to ensure accountability. By way of an Order in Council on recommendation from the Minister for the Environment, Kāinga Ora, the Ministry of Housing and Urban Development and local authorities may also receive permitted works powers in limited circumstances.
 
For everyone else, a pathway exists to get on the fast track bandwagon. Provided certain criteria are met, any person can apply to the Minister for the Environment to have a project referred to the expert consenting panel. With a maximum 70 day decision-making timeframe for most projects, no notification requirements, potentially no hearing and no appeals (other than on points of law), it’s a handy process if you can get it. Although getting it may well be the trick! The Bill gives the Minister almost complete discretion as to whether to refer a project on to the consenting panel and this will assist to ward off successful judicial review (although may not stop it as a tactical stall).  
 
Again, however, the Bill provides for a detailed application and assessment of environmental effects to reach that determination, which will have implications for all applicants. While the Bill indicates that an application need only provide a “general level of detail”, working out what the Minister will actually need to see to be convinced of the merit of the application will be critical – particularly given the substantial number of applications that are anticipated and the requirement for the Minister to invite comment on the application from a range of other Ministers.
 
There is no doubt the legislation is laudable in its attempt to urgently consent projects that can deliver jobs and catalyse the economy. However, in our experience, “fast tracks” are not the panacea they initially appear to be. Our experience acting for the government recovery agencies under the Canterbury Earthquake Recovery Act 2011 and the Greater Christchurch Regeneration Act 2016 is that processes that require Ministerial decisions can be slowed by myriad factors including the wider political environment. Even under the current streamlined plan processes in the Resource Management Act 1991, the Ministerial decision to agree the “fast track” or otherwise has taken, on average, seven months over the six applications so far approved (before the actual process for council or judicial decision-making even starts). In a similar vein, it is our experience that the political goodwill expended on these processes can wane with time and particularly after the first judicial review (especially if the Minister is reprimanded by the Courts).
 
The legislation is well-constructed and could definitely be a game-changer for many projects, with a resultant stimulus to the economy. The question is whether it will be more successful than its predecessors in actually producing the promised time-savings. Navigating the necessary Ministerial approval processes will require considerable skill and strategic nous. Retaining advisors well-versed in these processes will be critical, particularly in the early stages where all potential applicants are endeavouring to work out what the legislation requires.
 
If you would like more information on whether your project might be assisted by this new process, please feel free to contact us. We expect demand for the Minister’s attention under this legislation to be high and providing a compelling case early will be a significant advantage.

Electronic signatures
The Contract and Commercial Law Act 2017 (Act) defines the term “electronic signature” in relation to information in electronic form, as “a method used to identify a person and to indicate that person’s approval of that information”.

This could include anything from the scanned version of a signature, the ticking of an “I accept” option or a signature formed by a finger on a tablet or smartphone.

The Act provides for statutory validation of an electronic signature, subject only to a few exceptions. The general rule is that, where any legislation requires dealings to take place on paper, that dealing is also permitted to take place electronically, provided the signature meets certain requirements, both parties agree and the dealings are not expressly excluded from the Act.

Signature requirements
A valid electronic signature can be broken down into the following three requirements:

• the signature must be in electronic form;

• the signature must be used to identify a person; and

• the signature must be used to indicate that person’s approval of that information.

Any signature used to identify a person must be reliable. There is a presumption in section 228 of the Act that an electronic signature is reliable if:

• it is linked to the signatory only and to no other person;

• the means of creating it were under the control of the signatory only;

• any alteration made after signing is detectable; and

• its purpose is to provide assurance as to the integrity of the information to which it relates.

Section 226(1)(a) of the Act requires that a signature must “adequately [indicate] the signatory’s approval of the information to which the signature relates. The ADLS signing system, for example, inserts a sentence after the signature stating that the person intends to be bound by the document they are signing.

Types of documents that can be electronically signed
The Act does not list the documents permitted to be electronically signed. Instead, it lists documents that may not be (see below).

In practice, the following documents can be electronically signed:

• commercial agreements and deeds;

• agreements for the sale and purchase of land or interests in land;

• leases;

• director, shareholder and trustee resolutions;

• Authority and Instruction forms (A & I Forms) authorising a lawyer or conveyancing practitioner to sign a land transaction document electronically, although with some limitations as set out below; and

• information that is required to be given in writing in person, but only if the person receiving the electronic signature consents to it.

Types of documents you cannot electronically sign
Schedule 5 of the Act provides examples where an electronic signature cannot be used, including:

• election and referendum documents;

• certain notices given under citizenship laws;

• wills;

• affidavits;

• statutory declarations;

• documents that are given on oath or affirmation;

• powers of attorney and enduring powers of attorney;

• warrants authorising entry to premises; and

• information that is required to be given in writing in person.

A & I Forms
A & I Forms are the method used by clients to instruct lawyers and conveyancing practitioners to certify and sign land transaction documents. Lawyers and conveyancing practitioners rely on properly signed and witnessed A & I Forms to electronically sign land transaction documents in a system known as Landonline.

The reliance on A & I Forms is regulated by Land Information New Zealand (LINZ) and is subject to audit. LINZ issues guidelines setting out requirements for the use of A & I Forms.

For a lawyer or conveyancing practitioner to rely on an electronically-signed A & I Form, the lawyer or conveyancing practitioner must be certain that:

• the means of creating the electronic signature is linked to the signatory and to no other person;

• the means of creating the electronic signature was under the control of the signatory and of no other person;

• any alteration to the electronic signature made after the time of signing is detectable; and

• where the purpose of the legal requirement for a signature is to provide assurance as to the integrity of the information to which it relates, any alteration made to that information after the time of signing is detectable.

Recent guidance from LINZ also requires that the electronic system provide the lawyer or conveyancing practitioner with:

• audit records that can be produced if the transaction is audited; and

• assurance – i.e. the system provides sufficient information and safeguards to ensure that lawyers and conveyancing practitioners can make certifications on the basis of the information supplied to them.

As A & I Forms are used to enable changes to the land transfer register, it is crucial that lawyers and conveyancing practitioners are certain that all of the above requirements are met. We expect that the above requirements are likely only complied with if the lawyer or conveyancing practitioner sets up the electronic signing process using a program known to the lawyer or conveyancing practitioner or otherwise obtains comfort about the system used by their client.

In addition, the electronic signature must be witnessed by a “trusted professional” (except for some governmental or publicly-listed entities, where no witness is required). This normally requires that a lawyer or similar professional be present when the signature is applied (through an electronic signing program or with ink) to the A & I Form. Remote witnessing by audio-visual technology is available, but that witness must then be the lawyer or conveyancing practitioner who will be relying on the A & I Form to sign the land transaction document.

 The Urgent Measures Bill introduces a number of changes which will reduce the regulatory burden on investors and will also bring in those changes previously detailed in the Overseas Investment Amendment Bill (No 2) that the Government considers are urgently required. These are intended to take effect once the Urgent Measures Bill is in force. The remaining provisions of the Overseas Investment Amendment Bill (No 2) that have not been fast tracked under the Urgent Measures Bill will move into a new bill, the Overseas Investment Amendment Bill (No 3), which will proceed through the usual legislative process, and is expected to pass through Parliament in the next 12 months.
 
The Covid-19 pandemic and the economic downturn have created new foreign investment risk, and the Urgent Measures Bill is intended to stop vulnerable New Zealand assets being subject to foreign takeover during the economic fallout from Covid-19. Speaking of the Urgent Measures Bill, Associate Finance Minister David Parker has said:

“Hypothetically, with international tourism at a standstill the value of a significant tourism company may have plummeted and could be low or near zero. That value would not reflect the importance of the business, so interim controls are needed to protect our national interest.”

The Urgent Measures Bill had its first reading on 14 May, and it is intended to be passed quickly with a shortened Select Committee process. It is anticipated the Urgent Measures Bill will come into force in the middle of June.
 
The key changes under the Urgent Measures Bill are:

• The introduction of a temporary emergency notification requirement for key control transactions that would not ordinarily have been covered by the Act.

• The introduction of the national interest test in respect of strategically important businesses.

• Once the temporary emergency notification requirement is no longer required, the introduction of a right for the Government to exercise a call-in power in respect of both investments in businesses not ordinarily screened by the Act but which may pose significant national security and public order risks, and investments in businesses that hold or generate certain types of sensitive data. This right will also apply to the majority of investments captured by the national interest test.

• Simplification of the overseas investment regime by reducing the number of applications that require screening, bringing forward certain measures set out in the Overseas Investment Amendment Bill (No 2).

These changes are discussed in detail below.
 
Temporary Notification Requirement
 
The temporary notification regime requires certain transactions to be notified to the Government, even if these transactions would not ordinarily require consent under the Act. Under the regime, overseas investors will be required to notify the Government before they proceed with an investment in a New Zealand business that involves:

• the acquisition of a more than 25% interest in a business;

• an increase an existing interest in that business to, or beyond, certain thresholds (being 50%, 75% or 100%), or the acquisition of more than 25% of the business’ assets (by value). This requirement will apply regardless of the dollar value of the investment; or

• the acquisition of property (including goodwill and other intangible assets) in New Zealand used in carrying on business in New Zealand (whether by one transaction or a series of related or linked transactions) of any value that effectively amounts to a change in control of the business.

Once notified, the Minister will then consider whether the investment is contrary to the national interest. The Minister may impose conditions on, or prohibit, certain transactions. It is anticipated that the majority of transactions will proceed without any Government intervention or any conditions imposed.
 
The Urgent Measures Bill requires the notification to be provided prior to transaction closing, in writing. The exact details of the requirement are yet to be prescribed in regulations, but it is anticipated that the investor will be required to provide certain details on the transaction to the Overseas Investment Office, such as  the identity, ownership and control details of the investor, any links to foreign governments, broad transaction details including the nature of the business or property to be acquired and the commercial rationale for the purchase (including as to pricing and valuation). A notification form will apparently be available on the Overseas Investment Office’s website.
 
The Government intends that investors will be notified within 10 days whether a transaction could be contrary to New Zealand’s national interest and subject to a further detailed review, which is to be processed within 40 days and may be extended by up to 30 days. The exact details and timeframes will be set out in the regulations. There will be no fee for submitting a notification.
 
Failure to comply with the notification requirements also means that the Government could later unwind the transaction if it fails the national interest test.
 
Even if not notified formally, the Minister may exercise his or her own discretion and determine a transaction to be contrary to the national interest, with the same potential unwind consequences.
 
The temporary notification requirement will be reviewed every 90 days and will only remain in place while the Covid-19 pandemic and its associated economic impacts continue to have a “significant effect in New Zealand” – a matter open to interpretation at the margins but which potentially could be for quite a long time.
 
Acceleration of the National Interest Test
 
The national interest test will allow the Minister of Finance to deny consent to any investment ordinarily screened under the Act that is considered to be contrary to New Zealand’s national interest (including security, economic and other interests). This power has been modelled on the Australian regime, but with the addition of an express discretionary Ministerial extension of the concept. This power and discretion cannot be delegated to the OIO.
 
Transactions of national interest are broadly defined as transactions already requiring consent under the Act which result in:

• an investment by a non-New Zealand government investor;

• an investment in a strategically important business (for example, military or dual use technology, security and intelligence, electricity and water, telecommunications, financial market infrastructure, significant airports and ports, or any key supplier to these, all as detailed in regulations yet to be drafted); or

• any other investment that the Minister considers could be contrary to New Zealand’s national interest, provided that the Minister has notified the applicant that the transaction is being considered as such.

 Please refer to our previous article here for further details of the national interest test.
 
“Call-In” Powers
 
Once the temporary emergency notification requirement is removed, the Government will have replacement “call-in” powers to review certain investments in strategically important businesses which would not ordinarily be captured by the Act. This power would allow the Government to call in certain transactions, place conditions on or prohibit certain transactions from proceeding where they are perceived to pose a risk of harm to New Zealand’s national security or public order. The call-in power would apply to those types of business captured under the national interest test (excluding large irrigation schemes), and will extend to investments in businesses that hold or generate certain types of sensitive data (for example health or financial data). 
 
Please refer to our previous article for further details of the “call-in powers” (see above link).
 
Changes to simplify the Overseas Investment Regime
 
Certain changes originally introduced under the Overseas Investment Amendment Bill (No 2) are being fast tracked under the Urgent Measures Bill with the purpose of reducing the regulatory burden of the Act. This is in part due to the Covid-19 pandemic, as well as the expected time period for the passage of the Overseas Investment Amendment Bill (No 3) through Parliament.
 
The Urgent Measures Bill proposes to make it simpler to make productive investments in New Zealand by:

• introducing a statutory standing consent in respect of certain New Zealand listed issuers and managed investment schemes;

• reducing the number of fundamentally New Zealand entities that must obtain consent under the Act;

• narrowing the definition of overseas person for all other non-natural persons such that a more than 25% interest must be held by overseas persons before the entity can be deemed to be an overseas person;

• introducing streamlined consent criteria for investments in less sensitive New Zealand land that is only screened because it adjoins land that is sensitive in its own right;

• simplifying the investor test by undertaking more targeted assessments of an investor’s character; and

• reducing the number of small transactions that do not change control of sensitive assets that must get consent.

 Details of these are covered in our earlier article (see above link).
 
If you would like more information on the Urgent Measures Bill or application of the Overseas Investment Act generally, please contact us. We will provide further details of interest on the Urgent Measures Bill and regulations as they become available.