News & Insights

Build to Rent Developments

BTR developments are a form of privately-owned rental housing comprising 20 or more dwellings, which are ordinarily owned and professionally managed long-term by an institutional investment entity such as a pension fund. The rentals are typically for longer term tenancies, giving tenants increased housing certainty, reliable property maintenance services and access to shared development amenities such as cafes, gyms, media rooms and co-working spaces.

BTR developments are increasingly popular in Australia and the United Kingdom. While it is a newer housing model in New Zealand with only 22 registered developments so far, it is believed there is high potential for growth in the sector.

Industry groups such as the Property Council have been advocating for changes to the Act in order to increase affordable rental stock in New Zealand, and reduce investment barriers for New Zealand and overseas developers and institutional investor owners. BTR developments are currently viewed as a risky investment as a potentially stranded or illiquid asset class. There is little incentive to build or buy a BTR development considering the risk that developers may be stranded with the asset if New Zealand investors have insufficient capital to acquire it, and overseas investors face strict hurdles to entry under the Act. It is hoped that streamlining the test will increase both overseas and New Zealand investor confidence in BTR developments, with greater certainty that investors can exit and on-sell to a larger pool of purchasers.

Current Position

Currently, under the Act, applications for the creation of new BTR developments, or the acquisition of existing BTR developments, must proceed under either:

• the increased housing test - for increased housing on residential but not otherwise sensitive land (section 16(1)(b)(i)(B));
• the more onerous benefit to New Zealand test - for land which is otherwise sensitive (section 16(1)(c)(ii)), or for the acquisition of existing developments where the existing housing stock is not increasing (section 16(1)(b)(ii)); or
• the significant business asset test (section 18) – for the acquisition of qualifying securities in a BTR owning or developing entity.

The Amendment Bill

The much anticipated Bill was released on 11 June 2024, setting out the proposed new streamlined pathway, called the “large rental development test”.

The large rental development test is for residential but not otherwise sensitive land being acquired as an existing large rental development (provided investor requirements are met). It will allow the acquisition of existing developments that are not increasing the housing supply, to proceed under the large rental development pathway, rather than the benefit to New Zealand test. This is intended to reduce the illiquidity risk of developers being unable to on-sell BTR developments where an investor would have to otherwise increase the housing supply to qualify for the streamlined increased housing test.

Land which is otherwise sensitive, will still need to proceed under the benefit to New Zealand test. The existing streamlined pathway under the increased housing test will continue to apply for new or expanding BTR developments which are increasing the housing supply.

The new test is also intended to enable other types of large rental developments that are functionally the same as BTR but may not be the same housing type, such as worker accommodation.

The large rental development test streamlines the consent process where:

• an overseas investor acquires an interest in residential land (a single site, or adjacent sites separated by infrastructure such as a road);
• there are 1 or more buildings with 20 or more dwellings across them, suitable for, or for conversion for, residential dwellings;
• at least 20 of the dwellings will be made available for a residential tenancy to occupiers within a satisfactory time frame; and
• the non-occupation outcome will be met.

Consent will be conditional on investors continuing to make at least 20 of the dwellings available for residential tenancy, otherwise the owner must divest their interest in the asset. Owners no longer need to be “in the business of providing residential dwellings” in the rent-to-buy or shared equity space, as they did previously.

There will be an opportunity to provide feedback on the Bill at the Select Committee stage.

Associate Minister of Finance Hon David Seymour’s Ministerial Directive Letter to the OIO on 6 June 2024 (Directive Letter)) which was a prelude to the Bill, together with the explanatory note in the Bill, emphatically encourages BTR housing developments as a means of addressing the housing crisis and attracting overseas investment. In anticipation of the Bill being passed later in the year, the Minister has directed the OIO to consider investment in housing supply and the operation of existing large scale housing developments as a benefit under the benefit to New Zealand test. The Minister considers that the benefits that flow from addressing the risk of stranded assets and from the continued operation of an existing large scale housing development may be sufficient to satisfy the benefit to New Zealand test even if no other benefits will result from the investment.

The Directive Letter and the introduction of the Bill are a clear pronouncement to overseas investors of the Government’s support of BTR developments, indicating the doors are opening for increased investment in this space.

If you have any questions on the Bill, or are an overseas investor considering investing in BTR developments or land to develop in New Zealand, please contact Brigid McArthur, Ranui Calman, Annabel Crawford or Anna Hickmott from our Overseas Investment team.

The “bones” of the new approval process as set out in the FTA Bill are broadly similar to the COVID-19 Recovery (Fast-track Consenting) Act 2020 (COVID Act), which was responsible for the consenting of some 66+ projects generating nearly 60,000 full time equivalent jobs across New Zealand over its four-year life-span.  The COVID Act process also provided the template for the fast-track process within the Natural and Built Environment Act 2023, which has survived repeal of that Act, albeit only for the time being. 

Given the similarities between the processes, in this update we have focused on some notable departures from the COVID Act process (as currently drafted, but subject to the Select Committee submission process still to come) below:

1.  Pathways (or “tracks”) – As with the COVID Act, projects must first be recognised or approved as qualifying projects in order to access the fast-track consenting process.  The ultimate decision-making authority for that qualifying stage lies with the “joint Ministers”, generally being the Ministers for Infrastructure, Transport, and Regional Development. 

A project can qualify for referral to the fast-track process via the following pathways:

(a)   The “open” pathway.  Anyone may apply to the joint Ministers for a project to be referred, subject to a number of criteria that a project must meet to be considered for referral (discussed further below).

(b)   The “listed” pathway.  This pathway (which is actually two pathways) is intended to create what Minister Bishop has described as a “pipeline of projects” whereby the fast-track process is made available projects which “may not be economic right now”, but will realise significant national or regional benefits if and when they become viable for delivery. 

        The “pipeline” is divided into two categories:

        (i)    “Schedule 2, Part A listed projects”.  These projects do not need an application for referral.  The relevant “authorised                   person” (to be noted within Schedule 2, Part A) may simply issue a request to the EPA that all or part of those projects                 are referred for fast-track consenting.  The EPA cannot decline that request. 

        (ii)   “Schedule 2, Part B listed referred projects”.  These projects are considered to have “nationally or regionally significant                 benefits” and may be referred directly to the fast-track process by joint Ministers in accordance with the process set                     out in the FTA Bill. 

        These Schedules will be populated prior to enactment of the Bill and will be selected by Cabinet on the recommendation of            a Fast Track Advisory Group.  There will be an opportunity to apply to the Group for admission of a project to that                        Schedule, subject to meeting certain criteria which will be published in the coming weeks.

2.  Decision-makers – The FTA Bill significantly expands the decision-making power of Ministers.  Of particular note, expert consenting panels will no longer have the final say over the grant of consent for referred projects; that responsibility now sits with the joint Ministers, with expert consenting panels reduced to a recommending role on the application for the approval (including any conditions).  Importantly, unlike the timeframes in place for expert consenting panel decisions, there are no statutory timeframes for Ministerial decisions, which (in our experience of the referral phase of the COVID Act) can lead to a bottleneck in the process.  There is, of course, a broader question as to the appropriateness (or otherwise) of Ministers having the final say on consenting decisions, even if the scope for “deviating” from an expert panel’s recommendations is limited.  We expect that question will be the subject of detailed submissions during the Select Committee process.

3.  Decision-making framework – The purpose of the FTA Bill is significantly more expansive, and pro-development, than prior fast-track regimes.  The intent is to deliver a fast-track process to “facilitate the delivery of infrastructure and development projects with significant national or regional benefits”. 

Considerations relevant to determining what constitutes “significant national or regional benefits” include whether the project:

(a)     has been identified as a priority project in a central or local government or sector plan or strategy;
(b)     will deliver regionally or nationally significant infrastructure or whether it will increase the supply of housing, address                  housing needs, or contribute to a well-functioning urban environment;
(c)     will support primary industries or the development of natural resources, including minerals and petroleum;
(d)     will support climate change mitigation or adaptation, resilience and recovery from natural hazards; and/or
(e)     will address significant environmental issues.

Unlike the COVID Act, the FTA Bill establishes a clear hierarchy of decision-making criteria, starting with the purpose of the FTA Bill.  That is followed by sections 5 – 7 of the RMA (with section 8, which requires decision-makers to have regard to the principles of Te Tiriti, notably absent), followed in turn by the RMA’s hierarchy of planning documents.  The requirement to separately consider those matters is somewhat at odds with the now well-established approach of effectively relying on the way in which those documents have implemented Part 2, unless there is some suggestion that the documents have not appropriately incorporated Part 2 outcomes. 

One of the most controversial aspects of the FTA Bill is the absence of any reference to the principles of Te Tiriti.  This is a significant departure from the approach taken in environmental legislation for the past 30 years, and is a major step change from the COVID Act and the now-repealed Natural and Built Environment Act 2023. Again, we anticipate this will be the subject of extensive submissions (both in support and opposition) during the Select Committee process.

4.  Removing RMA constraints – Section 104D of the RMA (commonly referred to as the “gateway test”) will not apply to the assessment of resource consents under the FTA Bill.  Notably – unlike the COVID Act – a project will not be ineligible for utilising the fast-track process on the basis that it includes an activity that is prohibited under the RMA and resource consent may be granted under the FTA Bill for prohibited activities or activities which are inconsistent with national directions.  This represents a strong commitment from Central Government to substantially reduce perceived planning constraints on development and infrastructure projects of scale.

5.  Approvals – Like the COVID Act, resource consent applications and notices of requirement may both be considered under the FTA Bill. (Plan changes are not available for fast-tracking.)  Changes in conditions to consents granted under the FTA Bill will still need to processed under the RMA – somewhat incongruously to the “pipeline of projects” notion.  The FTA Bill has, however, extended the type of approvals which may be sought through the fast-track process to include approvals, licences, permissions, clearances and other authorities under the Heritage New Zealand Pouhere Taonga Act 2014, the Crown Minerals Act 1991, the Exclusive Economic Zone and Continental Shelf (Environmental Effects) Act 2012, the Conservation Act 1987, the Reserves Act 1977, the Fisheries Act 1996 and the Wildlife Act 1953.

No changes have been made to the land acquisition process under the Public Works Act 1981, except to allow (but not require) the Environment Court, when hearing an objection to a proposal to take land, to accept a determination made under the fast-track process relating to the adequacy of consideration given to “alternative sites, routes, or methods of undertaking the work”.  This is a relatively insignificant change and, for various reasons, may have limited benefit.  We understand, from public statements made by Ministers, that more changes to the Public Works Act 1981 may be coming.

If you would like to know more about the Bill or require assistance in lodging a submission, please contact Francelle Lupis or Rachel Murdoch from our Resource Management team. 

/files/download/documents/FAQ_ Retentions Regime 2023 changes.pdf

New Act and Regulations

The Incorporated Societies Act 2022 (New Act) and its associated regulations (New Regulations) came into force on 5 October 2023.  The New Act:

• provides for the repeal of the Existing Act; and

• replaces the Existing Act with a more modern legal, governance and accountability framework for incorporated societies to operate in New Zealand.

From 5 October 2023, all existing incorporated societies are required to re-register under the New Act, and they have until 5 April 2026 to do so (this is referred to as the “Transitional Period” under the new Act).  The provisions of the New Act will not apply to an incorporated society until it has re-registered under the New Act (the provisions of the Existing Act will continue to apply to that society in the meantime).   Any society which fails to re-register by 5 April 2026 will cease to exist after that date. 

Any new society wanting to incorporate as an incorporated society must now register under the New Act. 

Key changes

The following is a summary of the key changes introduced by the New Act:

• Members / consent. An incorporated society must, as a pre-requisite to being registered, have no fewer than 10 members (under the Existing Act, the requirement is for at least 15 members).  Each member must consent to become a member of the society.

• Committee. An incorporated society must have a governing body (or committee) made up of no fewer than 3 members (called “Officers”).  Importantly, a majority of Officers on the committee must be members.   Under the existing Act there is no requirement for a committee.  The Act also sets out certain qualifying criteria for Officers.

• Constitution. An incorporated society must have a constitution which complies with certain requirements of the New Act, including a dispute resolution procedure to govern any internal disputes in a way that is consistent with natural justice.  The constitution replaces the “rules” under the Existing Act.  It is incumbent upon the society to ensure that its constitution is compliant with the New Act - the Registrar of Incorporated Societies does not review these, like they did the rules under the Existing Act.

• Officers duties.  Officers (which include the committee members, general manager/CEO, treasurers etc.) now have certain broadly expressed duties to the society which have been modelled on the directors’ duties in the Companies Act 1993.  These include to:

             o       act in good faith and the best interests of the society;
             o       exercise powers for proper purposes only;
             o       comply with the New Act and the society’s constitution;
             o       exercise reasonable care and diligence;
             o       not create a substantial risk of serious loss to creditors; and
             o       not incur an obligation the officer does not reasonably believe the society can perform.

     Officers are directly and personally liable to the incorporated society, whose members may apply
     to the Court to enforce them.  The New Act allows societies to keep and maintain insurance for
     Officers in respect of such liability.

• Contact person.  An incorporated society must have a dedicated contact person whose details are provided to the Registrar of Incorporated Societies (and will otherwise not be publicly available).  The contact person need not be a member – but could be an accountant, lawyer or other business advisor.

• Financial and other reporting.  Incorporated societies must now use XRB accounting standards in the preparation of financial statements (this requirement does not apply to “small societies” – being societies which are not registered charities and have total operating payments of less than $50,000 and total current assets of less than $50,000, for the last two financial years).  An incorporated society is required to file financial statements and annual returns within 6 months of its balance date in every year.

• Language.  the documents and records of an incorporated society, such as the constitution, bylaws and financial records can be written in either English or te reo Maori.  Similarly, the name of the society must have a name that ends with either or both of “Incorporated”, “Inc” or “Manatopu”.

• Amalgamation. The New Act prescribes a process for amalgamation of two or more societies (such process being a similar to the process for amalgamation of companies under the Companies Act 1993).

• Criminal acts.  The New Act makes it a criminal offence to:

             o       make a false statement;
             o       fraudulently use or destroy property;
             o       falsify documents;
             o       defraud creditors;
             o       dishonestly operate under a name for which the word “Incorporated”, “Inc” or
                     “Manatopu” is the last word, when that organisation represented has not been
                      incorporated under the New Act or any other act allowing for the use of those words;
                      and
             o       breach a banning order (which is a court order disqualifying a person from being
                      an Officer of a society due to criminal or reckless conduct or incompetence etc.).

Comments

The changes introduced by the New Act are, in the main, likely to improve the way that sports clubs, associations and other not-for-profit organisations are governed in Aotearoa New Zealand. 

The requirements of the New Act may not, for some of the larger and more sophisticated organisations, have a significant impact on governance practices.  For smaller organisations (or those largely run by volunteers), the changes may be considerable and, in some cases, onerous: some may struggle to recruit and retain Officers particularly if there is little to no funding allowance for liability insurance.  Others may struggle to meet the cost of compliance.

Societies should use the Transitional Period to ensure that they are in a position to be compliant with the New Act at the time of re-registration.  This may include:

• reviewing their existing rules in order to assess what changes are needed in order to have a compliant constitution under the New Act;

• reviewing existing member application processes to identify the changes needed to ensure the consent of every new member is obtained (and in respect of all existing members, collecting their consent);

• formation of a committee and/or revising the composition of an existing committee in order to ensure the committee has a majority of members (as opposed to independent Officers);

• considering whether the existing/new Officers will meet the officer qualifying criteria under the New Act;

• considering who the Registrar’s contact person will be; and

• identifying which tier of the XRB accounting standards applies to the particular society and considering the potential outsourcing of certain tasks to a professional consultant, such as preparation of financial statements.

Societies should also consider the extent to which they wish to keep and maintain insurance for the liability of their Officers – it may otherwise be practically difficult to attract Officers to those roles, given the additional liability created by the new duties.

Please contact Kelly Johnson (or your usual contact at Greenwood Roche) if you have any queries in relation to the New Act and how it may affect your incorporated society.

With construction well underway, 42 to 50 Kelburn Parade will soon be home to ‘The Living Pā’, a revolutionary marae precinct redevelopment and the latest addition to the University’s Kelburn campus.  The 3000 sqm project will serve as an ‘incubator for innovation’ and a sustainability beacon that redefines our understanding of, and interaction with, the built environment.

The project is one of few striving for full ‘Living’ building certification in the Southern Hemisphere, the first mass timber building to do so, and the first amongst an urban environment.  The LBC framework requires the pā to be net positive in carbon, water, energy and waste and demonstrably giving back to the local community and surrounding ecology.

The LBC requirements reflect te ao Māori principles such as kaitiakitanga (guardianship), whanaungatanga (kinship) and whakapapa (lineage).  With Papaptūānuku under pressure, these principles have and will continue to have a profound influence on the project as it seeks the gold standard in sustainable building.  The Living Pā intends to create a positive impact on the natural and human systems that interact with it, continuing long after construction is completed.  Once completed, the pā aims to set the benchmark for future regenerative building projects.

Greenwood Roche assisted throughout the procurement process for this project, including to provide strategic procurement advice, draft and negotiate the early contractor involvement agreement and construction contract, and finalise the construction documents.

Our very own John Greenwood opened the evening with a summary of the Report of the Expert Working Group on Managed Retreat – A Proposed System for Te Hekenga Rauora/Planned Relocation and its recommendations, before our panel opened its discussion.  The evening closed with an informal Q & A session, where audience members had the opportunity to weigh in and quiz our panel members.

Over the course of the evening, a diverse range perspectives and concerns were aired and the discussion was educational and thought-provoking.  Key discussion points included:

• the ‘game of chicken’ between banks, insurers and Government, where no one wants to be the one to tell people they can’t live in their homes any more.  As a result of this, at-risk communities aren’t even aware of the scale of risk.
• the need to consult with communities.  Firstly, if a planned relocation system relies on using legislative powers as a primary tool to relocate communities then ‘the battle is already lost’.  Secondly, New Zealanders have deep connections to the whenua, and should only be made to leave if it is essential.  Thirdly, it is crucial that a Tiriti-based approach to planned relocation is taken.
• How do we plan for the scale of relocation required?  Researchers have estimated that over 282,000 houses, with an estimated replacement value of over $213 billion, are in flood hazard areas across Aotearoa New Zealand.  Further, around 80% of the marae in the country are located on or near the coast or near flood-prone rivers.
• the limited current powers of local authorities in this area.  For example, local authorities can approve the building or strengthening of seawalls, but are not empowered in relation to many other mitigation or adaptation activities, so naturally, people lobby for building or strengthening seawalls, irrespective of how effective it will be.

 We look forward to continuing the conversation going forward and hosting more events of this type as part of our commitment to improving broader outcomes under our new GreenPrint initiative.

 Finally, a special thank you to all our panellists: Rawiri Faulkner (Environment and Culture at Ngāti Toa), Alison Howard (Manager for Climate Change Response at Wellington City Council), and Peter Nunns (Director of Economics at Te Waihanga / the New Zealand Infrastructure Commission).

Whakamihi to the team behind Wellington’s new Tākina Wellington Convention & Exhibition Centre – Wellington City Council, Willis Bond, Studio Pacific Architecture, Dunning Thornton Consultants, Beca, Holmes Fire, LT McGuinness and all the subcontractors and suppliers, which took home the highest accolade, the Greenwood Roche Supreme Excellence Award at the recent annual Property Council - Wellington Property Peoples Awards.  Over 360 guests, including a large contingent from Greenwood Roche, enjoyed the evening-long celebration at Tākina.

In a rare unanimous decision, judges commended the project team for the seamless delivery of a project of immense vision, scale and complexity, particularly when faced with the unprecedented disruption of the Covid-19 pandemic.

Judge Paul Robinson says, “the collaboration of the Tākina team has resulted in an extraordinary asset for the city – stunning architecture delivered on time and on budget – that greatly enhances the city and region.”

“Tākina is the Capital’s largest built infrastructure investment for two decades, spanning a build period of 3.5 years. Home to exhibitions and conventions which will boost tourism and dollar spend in Wellington, Tākina is a catalyst for further development in Wellington and greater investment in the region.”

We would like to extend our congratulations to all other award recipients and nominees from the evening with a special mihi to Lewis England, General Manager of Property Acquisition and Operations at Te Rūnanga o Toa Rangatira, who was awarded the coveted Beca Young Achiever of the Year Award and Richard Findlay, Managing Director of Colliers Wellington, who was presented with The Outstanding Leadership Award.

 Thank you to the team at Property Council New Zealand for organising the event and celebrating industry success.

 Greenwood Roche looks forward to continuing our long association with the Awards in 2024.

The NES-CF will apply to both plantation forests and exotic continuous-cover forests (carbon forests) that are established for commercial purposes.

The intention is that the environmental effects of large-scale forestry on the environment, communities and rural economies will be able to be better managed.

The NES-CF are clear national standards on the way forests can operate; regulating the activities of afforestation, pruning and thinning to waste, earthworks, river crossings, forestry quarrying, mechanical land preparation and replanting. 

The key changes from the NES-PF are that carbon forests will now be regulated by the standards (in addition to plantation forests) and there are greater powers for local authorities.  There is also a new permitted activity condition to manage slash at harvest and new requirements around the management of wilding trees.

Recent cyclones and extreme weather events and subsequent media coverage have brought the issues of location of forests and slash management into the public arena.  Whether the sharp focus on foresters is fair given surveys have shown only 2% of the post Cyclone Gabrielle debris in areas such as Wairoa was forestry slash appears to be a moot point. 

The NES-CF gives councils more control over the location of forestry and councils have the flexibility to introduce rules that reflect the views of the local communities through their planning processes. Councils can now also consider the following additional matters of discretion:

• planting location and species, including planting density and establishment practice;
• future harvesting and earthworks effects;
• the level of risk to communities and infrastructure that might be adversely affected by slash or sediment;
• the forest type (plantation or exotic continuous-cover); and
• management requirements to avoid adverse effects on ecosystems, freshwater, coastal and marine area, communities and infrastructure.

For the purposes of harvesting, land has been zoned green, yellow, orange or red.  Harvesting is a permitted activity in green, yellow and orange zones.  Limited harvesting in a red zone is also permitted in certain circumstances.  This hasn’t changed under the NES-CF.  What has is the slash management rules.  Now, in orange or red zones, slash from harvesting that is “sound wood” (wood that can be safely lifted using harvesting equipment and transferred to a landing without degrading or breaking up) must be removed unless it is unsafe to do so if it has a length of over 2 metres and a large end diameter of 10cm.  Some residual slash larger than this size (not exceeding 15m³ per hectare of the cutover) may be left on the site.  If the forest owner can’t meet this requirement, harvest will be a controlled activity and they will need to apply for consent.

A number of other technical and operational amendments have been made to the NES-PF. 

It will be interesting to see how these amended regulations affect our forestry industry going forward.  Regional differences will likely make navigating the consenting and forestry management and compliance spaces more complex and costly.  These additional restrictions and costs combined with increased ETS costs and a less forestry friendly overseas investment regime may ultimately result in less forestry over time.  This raises the question of how New Zealand will meet its domestic and international climate change targets. 

We were lucky enough to have a diverse range of perspectives represented, and the discussion was both informative and thought-provoking. We learned a lot about the upcoming challenges and opportunities that all parts of the industry see ahead in the coming year and beyond, and how different parts of the sector are reacting and preparing. We look forward to continuing the conversation with them and our wider community. Stay tuned for articles and other content that will follow on from our discussion – we believe that the insights shared at the event will be valuable to anyone working in the property and construction sector.

Finally, thank you to all of our panellists, Sharon Zollner - Chief Economist at ANZ New Zealand, Patrick Dougherty - General Manager (Construction & Innovation) at Kāinga Ora - Homes and Communities, Ralph Simpson - General Counsel (Disputes & Commercial) at Fletcher Building,  Jeremy Hay- Managing Director at RCP, and Tamati Parker - Director at C3 Construction.

Case Summary

The case involved two adjoining properties.  Bunnings Limited (Bunnings) owned one of the properties (Gilmore Site).  While the Gilmore Site was big enough for a Bunnings home improvement store, it fell short of the size required for a Bunnings Warehouse.  To establish a Bunnings Warehouse and to effectively compete with the Mitre 10 MEGA store, situated a mere 500 metres from the Gilmore Site, Bunnings would have needed to acquire the property adjoining the Gilmore Site.

To prevent this, NGB Properties Limited (NGB), a company related to the owner of the Tauranga Mitre 10 MEGA, acquired the property adjoining the Gilmore Site.  NGB then proceeded to further protect its interests by registering on the title an encumbrance containing a land covenant.

This covenant included a statement which provided that the owner of the land would not use any portion of the property for the purpose of carrying out the business of a hardware and home improvement retail store.

The Commerce Commission (Commission) received a complaint about NGB’s acquisition of the property adjoining the Gilmore Site and registration of the encumbrance against the title, and opened an investigation.

Following the Commission’s investigation, NGB accepted that the covenant contained in the encumbrance had the purpose of substantially lessening competition in the relevant market.  Accordingly, NGB acknowledged that it had breached section 28 of the Commerce Act 1986 (Act).  Section 28 prohibits the requiring, giving, carrying out, or enforcing of a covenant that has the purpose, effect, or likely effect of substantially lessening competition in a market.

When considering the appropriate penalty, Cooke J noted that, as the encumbrance was registered to impede Bunnings and other potential competitors from competing with the nearby Mitre 10 MEGA, it was important to impose a penalty that would serve as an effective deterrent to others.

Cooke J determined that, as no actual commercial gain arose from the offending, the maximum penalty imposable was $10 million.  He then considered the following mitigating factors / factors which lessened the seriousness of the offending, before accepting the parties’ proposed penalty of $500,000:

• Section 28(4) of the Act rendered the encumbrance unenforceable as its purpose was to substantially lessen competition.  Although accepting the Commission’s argument that removing the encumbrance would be costly and not necessarily straightforward, Cooke J determined that this ability to apply for removal must reduce the significance of the breach.
• NGB was unaware that the encumbrance was unlawful.  Although Cooke J acknowledged that a significant penalty should be imposed to bring light to the illegitimacy of such conduct, he took the view that NGB’s ignorance made the offending less serious.
• As NGB removed the encumbrance as soon as it became aware of its breach, and as it sold the property without the covenant, it did not benefit from the covenant nor did any anti-competitive effect arise from it. 
• NGB co-operated with the Commission, was a first-time offender, and took steps to address its breach (by removing the encumbrance and selling the property).

Significance

This case is important in the context of managing competitive behaviour.  Not only does it mark the first instance where the court has imposed a penalty for a breach of section 28 of the Act but, coupled with the following recent developments, it also sends a clear signal that there has been a tightening of competitive levers within the retail sector: 

• the recent enactment of the Commerce (Grocery Sector Covenants) Amendment Act 2022 (amending the Commerce Act), which outlaws land covenants and exclusive lease covenants in the retail grocery sector;
• the Commission’s recent market studies into the retail fuel market, the competition for residential building supplies, and the retail grocery market; and
• the Ministry of Business, Innovation and Employment’s recent public consultation into the effects of anti-competitive land covenants (which was initiated following the Commission recommending an economy-wide review of, among other things, the use of land covenants).

Key Takeaways

Landowners should be careful when considering the use of land covenants (whether registered in covenant instruments, leases or encumbrance instruments).  Whilst land covenants will still have their place (e.g. for maintaining aesthetic similarities within in a subdivision), landowners should now, more than ever, bear in mind the fact that they cannot be used for the purpose of substantially lessening competition. 

What will be considered as “substantially lessening competition” will of course depend on the particular circumstances of each case.  As a starting point, the following points have been noted by the Commission in March 2023 guidance as being more likely to cause a substantial effect on competition: 

• if the land covenant has a broader scope and/or a longer duration;
• if the land covenant has the effect of strengthening or reinforcing barriers to entry or expansion by competitors; and
• if the existing competition in the relevant market is already limited.

Seek Legal Advice

If you have any concerns over the potential anti-competitive effect of a land covenant, whether on your property or someone else’s, we would be pleased to advise.