A recent High Court judgment provides guidance on the types of penalties courts will impose where there has been a clear breach of the Overseas Investment Act 2005 (the Act). It also confirms the importance of understanding the Act’s approach to New Zealand parties acquiring sensitive land on behalf of, or in conjunction with, overseas investors, to avoid breaching the Act.
The penalties in this case total over $1.38 million, demonstrating that breaches of the Act can come with costly consequences. This case serves as a reminder for overseas investors to seek appropriate legal advice, as attempts to avoid the Act will not be looked upon favourably. Particular consideration should be given where there are arrangements between an overseas investor and a New Zealand party where the New Zealand party is acquiring sensitive land as these arrangements are the focus of the associated party provisions in the Act.
Land Information New Zealand’s website includes a list of enforcement action taken by the Overseas Investment Office since 2015. There have been three cases so far this year (including this one) where breaches of the Act were found and the defendants were ordered to pay civil penalties. The Overseas Investment Office can also seek orders requiring properties to be sold.
If you are considering investing in land that is potentially sensitive, talk to one of our experts to understand how the Act will apply.
In Chief Executive of Land Information New Zealand v Smith Road Farm Ltd [2021] NZHC 795, the three defendant companies bought five blocks of sensitive land at Awakino, Ngāruawāhia, Awaroa, Paranui and Manganui without first obtaining consent under the Act. There was no dispute that the defendant companies, and the family who controlled them, were overseas persons under the Act.
Details of the five acquisitions
The five acquisitions were by various companies controlled by the family and, in some cases, relatives based in New Zealand were used to invest on the family’s behalf. The details of the five acquisitions are:
- Awakino – a defendant company entered into an agreement to purchase 1,100 hectares of land. The purchase was completed on 1 December 2011.
- Ngāruawāhia – the daughter of the family entered into an agreement to purchase 1,146 hectares of land. She nominated a defendant company as purchaser. The purchase was completed on 27 February 2012.
- Awaroa – a defendant company entered into an agreement to purchase 284 hectares of land. The purchase was completed on 29 February 2012.
- Paranui – another defendant company entered into an agreement to purchase 786 hectares of land. The case does not specify when the land was purchased.
- Manganui – a nephew of the family entered into an agreement to purchase 354 hectares, and another of the defendant companies completed the purchase on 16 February 2016.
The total purchase price of the properties was $12.8 million.
Breach and aggravating/mitigating factors
The court found that the family knew consent was required to buy the land under the Act, but they were not well served by their lawyer, and the breaches of the Act reflected “negligence, not worse”.
The court also noted that the breaches were serious as the properties are large (and each is much larger than any other cases to-date under the Act) and because the properties were acquired for commercial gain, as the family involved wished to diversity their investment portfolio.
Under the Act, the Court has discretion to impose significant civil penalties for breaches of the Act, including an amount three times the amount of any quantifiable gain made by the breaching party in respect of the land in question. In considering an appropriate penalty, Justice Downs compared the facts of this case to three other cases. By way of mitigating factors, the defendants in this case admitted liability promptly, co-operated during litigation and agreed to pay the penalties sought. The family was also “contrite”.
Penalties
The penalties proposed by the Overseas Investment Office for each of the blocks of land were:
- Ngāruawāhia – one of the defendant companies had made a substantial gain here that had to be disgorged. Proposed penalty: $879,304.
- Awakino and Awaroa – proposed penalty: $236,250 (starting point of $315,000, less a 25% discount for mitigating factors).
- Paranui – proposed penalty of $138,750 (starting point of $185,000, less a 25% discount for mitigating factors).
- Manganui – proposed penalty: $127,500 (starting point of $170,000, less a 25% discount for mitigating factors).
Justice Downs found that these penalties were all within the range identified by case law, and the court ordered these penalties. The court also ordered the defendants to pay costs of $16,626.50.
This article was co-authored by Hannah McCay, a Solicitor in our Property team.
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