Overseas Investment: High Court provides new guidance on civil pecuniary penalties
Article date: 2021-05-11Over the last month, the High Court has imposed civil pecuniary penalties in three separate cases involving breaches of the Overseas Investment Act.
Over the last month, the High Court has imposed civil pecuniary penalties in three separate cases involving breaches of the Overseas Investment Act. In the latest case, the Court imposed a civil penalty for the first time on an overseas investor who leased (rather than purchased) land in New Zealand in breach of the Act.1
Key takeaways
The three recent High Court judgments reflect a growing increase in enforcement activity by the OIO over the last few years. Following amendments to the Act last year, which increased the maximum penalties and expanded the OIO's enforcement powers, we expect this trend to continue.
The judgments provide further guidance on the Court's approach to civil pecuniary penalties. Together with a series of other judgments released in the last few years, these judgments provide greater certainty as to the potential range of penalties that may be imposed in any particular case.
The most recent judgment (Zhao) is a timely reminder that the requirements of the Act apply to leasehold interests and not just to transactions involving the purchase of land (as noted below, there is a three year threshold for the lease of sensitive land under the Act, including any renewals).
All three cases were determined under the old penalty regime, which provided for a maximum penalty per breach of NZ$300,000 or three times the quantifiable gain. Last year, the NZ$300,000 limit was increased to a maximum of NZ$500,000 for an individual (or NZ$10 million in any other case). It remains to be seen how the courts will approach these increased penalties and the extent to which the previous case law will continue to be used as guidance.
We set out details of all three cases below.
First civil pecuniary penalty for leasing land in breach of the Act
The most recent judgment involved Mr Zhao, who leased a 20.5 hectare property in May 2014. This is sensitive land under the Act. The term of the lease was for 10 years, with a further 10-year right of renewal, which exceeded the Act's threshold of three years for a lease over sensitive land. At the time, the lessee was an overseas person for the purposes of the Act, and therefore consent was required before he entered into the lease. However, the lease was not conditional on consent being obtained, and consent was not sought. At the time the parties also entered into a sale and purchase agreement for the property for NZ$6,000,000 (which was conditional on Overseas Investment Office (OIO) consent), but this transaction was not completed. The lessee later self-reported the breach in 2018.
The High Court noted that this was the first case of a breach of the Act involving a leasehold interest and confirmed that breaches involving leases should not generally be regarded as less serious than cases which involve the sale and purchase of freehold land. Rather, the assessment of the gravity of a breach of the Act is a fact-specific exercise and requires the consideration of all relevant circumstances (including the substance of the transaction). The Court found that the term of the lease in this case alienated the land for a significant period, and that both the property's size and value were of significance. The Court also found that there was an element of premeditation, because the lessee was aware that he could not purchase the land without OIO consent. However, the seriousness of the breach was mitigated by the fact that he had limited proficiency in English, had relied on the vendor's lawyer for advice, and had assumed that the leasing transaction complied with the Act.
The Court characterised the breach as less serious than in several other cases as no freehold interest was acquired, there was no quantifiable loss or gain, and since entering into the lease the lessee had become eligible to acquire the land without consent. A starting point of NZ$70,000 was adopted, which was reduced to a penalty of NZ$49,000, taking into account the lessee's lack of previous offending under the Act, the fact that the property was not leased for commercial use, and that the lessee had co‑operated with the regulator and had admitted liability.
Other recent penalties
Zhao is the most recent of three High Court decisions issued over the last month imposing civil pecuniary penalties for breaches of the Act. In late March, the High Court imposed a penalty of NZ$125,000 in relation to a transaction involving the purchase of 23.3 hectares of land that was acquired in June 2017 for NZ$9,200,000.2 There, the Court found that the breach was moderately serious (but inadvertent, resulting from a failure to appreciate that consent was required). After taking into account the defendant's co-operation with the regulator, a penalty of NZ$125,000 was imposed.
Finally, the High Court recently issued another decision relating to several transactions that breached the Act.3 In this case, the defendants had made five purchases between 2011 and 2016 which involved more than 3,500 hectares totalling $12.8 million. The Court noted the seriousness of the breaches, given that the size of the land was larger than other previous cases under the Act, and because the properties had been acquired for commercial gain. The defendants had also known that consent was required to purchase the land.
The Court imposed penalties of:
NZ$879,304 in relation to a purchase of 1,146 hectares in Ngāruawāhia (reflecting a substantial gain that had been made),
NZ$236,250 in relation to two purchases in Awakino (1,100 hectares) and Awaroa (284 hectares),
NZ$138,750 for the purchase of 786 hectares in Paranui, and
NZ$127,500 for the purchase of 345 hectares in Manganui.
Each penalty (other than the disgorgement of the gain made in relation to the first property) reflected a discount of 25% for mitigating factors, including an admission of liability and co-operation during the investigation.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully advisor.
1Chief Executive of Land Information New Zealand v Zhao [2021] NZHC 857.
2Chief Executive of Land Information New Zealand v West Drury Holding Ltd [2021] NZHC 704.
3Chief Executive of Land Information New Zealand v Smith Road Farm Limited [2021] NZHC 795.
