Property

06 May 2009

What do the current legislative reviews mean for property ownership and investment

The Government has been particularly busy on the legislative front, so we are devoting a series of FYIs to some of the proposed law changes and reviews taking place. In this FYI, we focus on some of the legislative reviews affecting property ownership and investment. First up, we look at the Unit Titles Bill and one of the main changes proposed for unit titles properties. We also examine some of the issues to be considered in the review of the Overseas Investment regime.

Unit Titles Bill

In preparing the discussion papers and the Bill, the Department of Building and Housing noted that there have been major changes in the scale and nature of unit title developments in New Zealand since the Unit Titles Act was passed in 1972. The underlying impression is that the Unit Titles Act no longer deals appropriately with the rights and responsibilities of unit owners, body corporates, developers and tenants. In many circumstances this means that people are unaware of their rights and responsibilities and the industry is not well informed about how the Act applies to modern developments.

Key problems with the current legislation are alleged to be:

• the limited scope and purpose of the current Act;
• cumbersome decision making regimes;
• a lack of clarity about rights and responsibilities of parties involved, such as unit owners, bodies corporate, developers, professional body corporate managers and tenants;
• a lack of requirements on bodies corporate for long-term planning for funding and building maintenance;
• a lack of transparency and accountability of parties involved due to inadequate disclosure provisions;
• poorly informed decision making by unit owners and prospective unit owners;
• a lack of appropriate dispute resolution processes; and
• a lack of clarity and flexibility in technical and survey matters and processes.

The objective of the Bill is to provide a comprehensive legal framework for shared ownership and management of land associated building and facilities. Corollary objectives are to provide: clarity and flexibility in the subdivision land into units and common property; flexible governance and effective long-term management and maintenance of developments; and a more cost-effective disputes resolution mechanism.

We will be looking at a number of specific areas of the Bill in detail in future publications, but this issue will focus on the new disclosure requirements.

Consumer Protection

There are two disclosure regimes, one required by the original owner of the development to the body corporate, and one from owners of units to purchasers. In terms of sellers of units, the Bill prohibits the seller from contracting out of the disclosure obligations contained in the Bill. A seller of a unit must provide a disclosure statement to a prospective buyer before an agreement for sale and purchase is entered into. The content of what is called the pre-contract disclosure statement will be prescribed in the regulations to any new Act. The Bill also allows a buyer to request an additional set of disclosure materials.

Under the existing Unit Titles Act 1972 and the current edition of the Auckland District Law Society Agreement for Sale and Purchase of Real Estate (Eighth Edition 2006(2)), a vendor of a unit must provide a purchaser with a section 36 certificate from the body corporate together with copies of all insurance policies/certificates effected by the body corporate no later than five working days before the settlement date. This disclosure occurs after an agreement for sale and purchase has been entered into and if vendor doesn't provide the required information, settlement can be deferred at the purchaser's election.

A prudent purchaser would have reviewed past body corporate minutes and records either with an agent before entering into an agreement or via a due diligence type of condition. This would have alerted them to problems at an early stage, however unless otherwise agreed, there is no obligation on the vendor to provide this particular information.

A section 36 certificate lets the purchaser know details of any contributions and amounts payable by a vendor to the body corporate, what of those amounts has been paid, what interest is payable, details of any repairs, work or acts that have been performed or are to be performed by the body corporate, and whether notice has been received that proceedings are pending against the body corporate. As many people know, the matters covered by a section 36 certificate are not that exhaustive and one of the new features of the Bill is the requirement for much fuller disclosure to purchasers.

Under the Bill, a vendor of a unit will be required to provide a disclosure statement to a prospective buyer before an agreement for sale and purchase is entered into. More importantly, if an agreement for sale and purchase is entered into, the vendor must then provide a further disclosure statement (known as a Pre-Settlement Disclosure Statement) no later than five working days before the settlement date. The purchaser is also entitled to request an additional set of disclosure materials (known as an Additional Disclosure Statement) which are to be provided at the purchaser's expense. The content of these disclosure statements will be prescribed in the regulations to the new act and have not been drafted.

However, the Department of Building and Housing has issued some ideas of what might be picked up by the regulations. It is likely that vendors would need to be able to provide all information about the property including resource and building consents, contributions to the maintenance and sinking fund accounts and details of the accounts of the body corporate. Obviously these sorts of requirements will require body corporate managers to obtain and retain this information. If the Bill becomes law, owners will have to ensure that their body corporate manager understands the need to have this information available so that it can be provided to purchasers.

If the vendor fails to provide the Pre-Settlement Disclosure Statement or the Additional Disclosure Statement (if requested) in accordance with the time frames set out in the Bill, the purchaser may, by notice in writing, postpone the settlement date or cancel the sale and purchase agreement. This provides a purchaser with the additional option of cancellation which currently is not available.

Overseas Investment

Current Regime

Finance Minister Bill English recently announced a review of the Overseas Investment Act 2005 (Act) and the Overseas Investment Regulations 2005 (Regulations). He described the regime as "cumbersome", "complex" and "legalistic", explaining that New Zealand needed simpler rules and quicker decisions to attract foreign investment and help the New Zealand economy through the recession. We set out below some of the main concerns that we have from a property perspective and our initial recommendations for possible solutions. To understand the scope and potential impact of this review, you need to bear in mind the key features of the current regime.

Consent is required before an "overseas person" invests in "sensitive land", or "significant business assets", or fishing quota. An "overseas person" is someone who is not a New Zealand citizen or resident, and all overseas companies. An overseas person is also a New Zealand company or entity with 25% or more foreign ownership or control. An acquisition of an interest in "sensitive land" (including businesses that own or lease land) requires consent. "Sensitive land" includes non-urban land areas greater than five hectares, or other land classified as sensitive because it contains or adjoins waterways, parks, conservation areas, islands, or areas of historic significance.

A number of factors must be taken into account when applications for OIO consent are considered. The overseas person must have business experience and acumen relevant to the investment, be financially committed to the investment and be of good character. Additionally, where "sensitive land" is involved, the overseas person must demonstrate that the investment will result in a net benefit to New Zealand. This involves consideration of:

• whether the investment will result in new jobs, introduction of new technology or business skills, increased exports, added market competition, improved efficiency or production, additional investment for development, or increased primary processing;
• whether there are adequate mechanisms to protect and enhance significant flora and fauna, wildlife, historic heritage, walking access and areas of foreshore and seabed on the land in question; and
• any other factors set out in the Regulations.

Where the "sensitive land" includes foreshore, seabed, riverbed or lakebed ("special land"), the vendor must first offer back that "special land" to the Crown before consent will be granted.

Our thoughts on the matters that need addressing are briefly set out below:

• The information required is too complex. Advising clients, collating information and preparing applications is time consuming and expensive. Some applications can fill multiple folders and can take teams of people many weeks to prepare. 
• Obtaining OIO consent takes too long. It depends on the investment, but it typically takes several weeks to prepare an application and about three months for the OIO to process it (extreme cases have taken more than six months). Overseas investors struggle to compete with New Zealand buyers who can make unconditional offers with short settlement dates. 
• In many cases small or insignificant areas of land are deemed "sensitive land". For example, where a business owns or leases land which adjoins a small reserve, or perhaps a creek, the land being bought or leased constitutes "sensitive land" and consent is required. The net benefit test applies to investments in "sensitive land". Applicants must provide a lot of detailed information, including a five year business plan for the land or business. Applicants must also demonstrate that their investment in land will, or is likely to, benefit New Zealand (or any part of it). This test creates a ratchet, in that every overseas owner of an asset must do better than the previous owner. And this in turn creates a perverse incentive for owners to operate their business inefficiently to have the option to sell to an overseas person. 
• Part of the net benefit consideration is how the overseas investor will manage areas of significant vegetation, wildlife, historic heritage and walking access. This is easily dealt with for an industrial site in Auckland, but it becomes much harder when the investment involves extensive landholdings across the country or substantial rural land. In complex cases, expensive specialist consultants visit each site and categorise all plants and animals on each site, then come up with a management plan for each site.
• The new regulation 28(h) should be repealed. That regulation requires the Ministers to consider whether investments in strategically important infrastructure on "sensitive land" would assist New Zealand to maintain New Zealand control of such assets.
• The offer back of "special land" is a debacle. Where an investment involves "special land", the vendor must offer that "special land" to the Crown. Some material problems have arisen with this process. First, it is often difficult to determine exactly who owns the beds of waterways. Second, the process of survey, valuation and negotiation contemplated in the Regulations is not used - in order to get OIO consent vendors simply give the "special land" to the Crown. Third, often insignificant waterways constitute "special land", so a lot of effort and money is expended for little or no benefit.

Simpson Grierson is making submissions on this review and we are encouraging our clients to do the same. You can find a full breakdown of our thoughts on this very important review in our recent Corporate Advisory FYI which can be found here.

Authors

Phillip Merfield

Partner - Property & Infrastructure

DDI: +64 9 977 5096

Mobile: +64 21 935 407

Email:

View Profile

Michael Scannell

Partner - Property & Infrastructure

DDI: +64 4 924 3416 / +64 3 365 4312

Mobile: +64 21 437 644

Email:

View Profile

Greg Towers

Partner - Property & Infrastructure

DDI: +64 9 977 5051

Mobile: +64 21 963 653

Email:

View Profile

Michael Wood

Partner - Property & Infrastructure

DDI: +64 9 977 5329

Mobile: +64 21 772 974

Email:

View Profile

Greg Allen

Senior Associate - Property & Infrastructure

DDI: +64 9 977 5164

Mobile: +64 21 534 464

Email:

View Profile

John Craig

Senior Associate - Property & Infrastructure

DDI: +64 4 924 3426

Mobile: +64 21 044 6941

Email:

View Profile