Property / Real Estate

Overseas Purchasers of New Zealand Land – Test for Approval

Ministers directed to reconsider decision to approve sale of Crafar Farms

The High Court has ruled that the decision to approve the sale of 16 North Island farms to an overseas buyer should be set aside and that the relevant Ministers must reconsider their decision.

The court's ruling appears to create a higher threshold for overseas buyers who wish to invest in New Zealand farm land by applying a different test for assessing economic benefits of proposals to that applied to date by the Overseas Investment Office (OIO).

What happened?

In early 2012, the Associate Minister of Finance and the Minister for Land Information granted consent to Milk New Zealand Holdings Limited (Milk NZ), a subsidiary of a Chinese company, to acquire close to 8,000 hectares in 16 North Island farms. A consortium, including merchant banker Sir Michael Fay and iwi, (which wants to buy the farms, reportedly at a much lesser price than that offered by Milk NZ), applied to the High Court for a review of the Ministers' decision.

The Overseas Investment Act 2005 requires (amongst other things) that an overseas investment will, or is likely to, benefit New Zealand. In the case of non-urban land exceeding five hectares, the benefit has to be substantial and identifiable. The benefit test includes consideration of economic and non-economic factors. The economic benefit was a major ground of challenge by the consortium.

What did the court say?

The High Court considered that the OIO applied the wrong test to the assessment of the economic benefits. The OIO advised the Ministers that the Act did not require an overseas investor to do more than a New Zealand investor would do, but asked only whether the investment was likely to benefit New Zealand. In short, it insisted on a 'before and after' test for economic factors. This treated the likely behaviour of any alternative purchaser (such as investing a similar amount in development of the farms) as irrelevant.

Justice Miller concluded that the Act required the Ministers to assess the economic factors by considering what would happen 'with and without' the overseas investment. Use of the 'before and after test' meant that the economic benefits to New Zealand from the overseas investment were "materially overstated" in the OIO's recommendation, as many of the benefits from the purchase were likely to accrue regardless of who owned the farms.

The judgment makes it clear that the decision itself is one for the Ministers to make. The Ministers have to consider all the relevant economic and non-economic factors and determine what weight to place on them. The Milk NZ application featured numerous, significant, non-economic benefits. The decision involved issues of high policy, including New Zealand's international standing and economic policy, which were firmly within the province of the executive.

Where to now?

The Minister for Land Information, Maurice Williamson, has commented that ever since the Act was passed, the OIO has used a 'before and after' economic value test. It will now have to recalibrate its recommendation. A decision from the Ministers is expected to quickly follow that. Whatever the outcome, Crown lawyers will be taking a close look at the judgment to determine whether it should be appealed. However, as pointed out in the judgment, the Act was never intended to create a level playing field for all investors. Its purpose was always to prefer NZ investors in NZ assets. Ultimately, whether this should change is likely to be a political decision.

*Tiroa E and Te Hape B Trusts v Chief Executuve of Land Information [2012] NZHC 147

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The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.


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