The recent decision by Ministers Paula Bennett and Louise Upton to decline approval under the Overseas Investment Act 2005 (Act) for Pure 100 Farm Limited (Pure 100) to purchase Lochinver Station has generated a significant amount of media commentary.

Duncan Cotterill has considerable experience in the area of overseas investment, and we have reviewed the materials released by the Overseas Investment Office (OIO) relating to the Lochinver Station application. The Lochinver Station decision emphasises the importance of the application of the counterfactual test to OIO applications, and is the result of a continual process of refinement of the manner in which the OIO applies that test.

Ultimately, a conservative application of the counterfactual test by the OIO and the Ministers, and the consideration of the benefits claimed in the context of the purchase of a substantial property, led to Pure 100's application being declined.

The OIO's current approach to the counterfactual test will in some cases require an applicant to consider what a hypothetical purchaser might do with the property, which will often be a very difficult and uncertain analysis. Pure 100 has announced that it is seeking a judicial review of the Ministers' decision, with the aim of the review being to obtain clarity on what constitutes a viable counterfactual. Accordingly, the outcome of the judicial review will be of relevance to many future applications.

The Counterfactual Test

The new counterfactual test applied by the OIO in the Lochinver Station application arises from the High Court decision inTiroa E and Te Hape B Trusts v Chief Executive of Land Information [2012] NZHC 147. That case concerned the purchase of 16 dairy farms (the "Crafar Farms") by Milk New Zealand Holdings Ltd. The test applied by the High Court requires the OIO to apply a "with or without" test to applications made under the Act, so that an overseas investor can only rely on benefits that are unlikely to occur without the overseas investment.

The introduction of the new counterfactual test in 2012 changed the way that the OIO and the Ministers assess aspects of OIO applications, naturally resulting in a degree of uncertainty for subsequent applications. The Lochinver Station decision and the supporting materials, and ultimately the outcome of the judicial review, will provide additional guidance for potential overseas investors as to how the counterfactual test will be applied, and in particular how the OIO determines the likelihood of, and the intentions of, an alternate New Zealand purchaser.

In its application, Pure 100 claimed that it would undertake a number of developments at Lochinver Station, many of which would result in the creation of new jobs, increased export receipts, increased production, and the introduction of investment capital for development purposes. Those developments included:

  • The conversion of 600 hectares of land to dairy production;
  • The conversion of a forestry block and areas of wilding pine (379 hectares) to pasture;
  • The development of 500 hectares of poorer quality pastures into high performance pastures;
  • Development of a stock underpass; and
  • Construction of a new house for the farm manager.

Pure 100 submitted that the appropriate counterfactual was the status quo, as the Stevenson Group (the owners of Lochinver Station) had claimed that if the sale to Pure 100 did not proceed, it would retain Lochinver Station and continue to farm it in the current manner until an appropriate buyer could be found. If that was accepted, benefits arising from all of Pure 100's proposed developments would be "additional" benefits.

Pure 100's view of the counterfactual appears to have been based on the actual outcome of the sale process initiated by the Stevenson Group1. The OIO's view (as accepted by the Ministers) was that without the investment, the Stevenson Group would likely sell Lochinver Station to an alternate New Zealand purchaser who was likely to carry out some development. This reflects the approach taken by the OIO in other applications, where it has considered that the counterfactual must be more forward-looking than the immediate consequences of an application being declined. The OIO considered that an eventual sale was likely as farming was not a core business of the Stevenson Group, and as part of its strategic plan the Board had made a decision to sell Lochinver Station to a purchaser willing to pay the required price and commit to appropriate future development of the property.

In confirming its counterfactual analysis, the OIO commissioned a report from an economist that comments on the likelihood of an alternate New Zealand purchaser carrying out the proposed developments and having access to the capital required for those developments. That economic analysis suggested that an alternate New Zealand purchaser (being a competent and adequately funded farmer) would attempt to "unlock the potential of Lochinver Station" as:

  • There was an opportunity for significant increase in land value resulting from dairy conversion; and
  • A reasonably well capitalised alternate purchaser would be able to finance the proposed dairy conversion to a comparable scale as the development proposed by Pure 100.

The only development proposed by Pure 100 that the OIO considered was unlikely to occur without the overseas investment was the conversion of the forestry block and areas of wilding pines to pasture. The OIO also accepted that Pure 100 would likely build the new house to a higher standard than another purchaser.

Substantial and Identifiable Benefit

If "sensitive" New Zealand land is subject to an OIO application, the relevant Ministers or the OIO2 must be satisfied that the purchase of that land by an overseas person will benefit New Zealand. Where the land is non-urban land that exceeds five hectares, they must determine that the benefit will or is likely to be "substantial and identifiable".

In setting out their reasons for the decision on the Lochinver Station application, the Ministers have made it expressly clear that whether benefits are substantial and identifiable will be considered in the context of the size and nature of the investment.

Due to the nature of the transaction, the Ministers assigned the highest importance to the "economic benefit" factors in the Act and Regulations. Having discounted all benefits claimed from the other proposed developments after the application of the counterfactual test, the table below summarises the economic benefits3 arising from the proposed conversion of forestry and wilding pine to pasture (as accepted by the Ministers as being likely to arise) and the Ministers' ultimate assessment of them:

Benefits arising from conversion of forestry and wilding pine to pasture (as accepted by the Ministers)

Weighting assigned by Ministers

Ministerial comment

Job creation (1 fixed term part-time role)

Increased export receipts (not quantified)

Increased production (not quantified)


Increased processing of primary products (not quantified)

Capital investment4


Low           }

Low           }




Short term and limited in scale

Difficult to quantify and must be netted off against receipts from harvesting mature forest in 25 yrs. Any benefit considered to be small

Extent of processing likely to be relatively small

Not substantial, particularly given the size of Lochinver Station

Ultimately, in the context of the purchase of 13,843 hectares of land for approximately $88 million, the Ministers determined that the benefits that were likely to arise from the investment were not sufficient to be considered "substantial and identifiable".5

Significant Investment by the Owner

Of particular note in the media surrounding the Lochinver Station purchase are comments about the Stevenson Group's intended use of the sale proceeds from Lochinver Station. When Pure 100 entered into the contract to purchase Lochinver Station (subject to OIO approvals), the Stevenson Group announced that it wished to use the sale proceeds to develop a major new project around its large quarry operations at Drury, South Auckland (Drury South). The 15 year, $300 million development was reported as potentially providing 8,000 jobs.

One of the factors that must be considered by the OIO and the Ministers in assessing an application for OIO consent is whether the investment will, or is likely to, result in the owner of the relevant land undertaking other significant investment in New Zealand. A sale of Lochinver Station to Pure 100 would have freed up significant capital to the Stevenson Group that it could invest in other projects.

However, the OIO considered that while the Drury South development was likely to be a significant investment in New Zealand, it had been provided with insufficient information to determine whether granting the application would "likely result in" the Stevenson Group undertaking that investment, or whether the development would occur anyway. Based on the information provided to the OIO, the Stevenson Group was only considering becoming involved in the development of the Drury South land and had not yet made a final decision.

Even if the OIO had been provided with convincing information that the sale proceeds would have been committed to the Drury South project, an application of the counterfactual test to this factor would have likely discounted the extent of any such benefit. Lochinver Station was valued at $70 million, and the offer made by Pure 100 was reportedly $88 million. Applying the counterfactual scenario of a sale to a New Zealand buyer, it is likely that the OIO would have considered proceeds of at least $70 million would have arisen from any sale. Accordingly, to demonstrate additional benefit Pure 100 (and the Stevenson Group) would have had to show that:

  • The sale proceeds would have been committed to the project with a high degree of certainty[6];
  • There would be clear benefits from accessing an additional $18 million; and
  • There would be clear benefits from accessing the full sale proceeds earlier than could be achieved under a sale to a New Zealand purchaser (if the OIO was satisfied that a sale to a New Zealand purchaser under the counterfactual would not likely eventuate for a significant period of time).

Implications of the Decision

The OIO's recent approach to the counterfactual test shows that the application of this test needs to be very carefully considered, and will require detailed analysis and considered input from the vendors of properties subject to OIO applications. The fact that a recent marketing campaign has failed to produce a New Zealand buyer willing to meet the vendor's price expectations will not necessarily satisfy the OIO that a sale to a New Zealand is not an appropriate counterfactual scenario.

Where the alternate New Zealand purchaser is purely hypothetical, it can be very difficult to determine what such a hypothetical purchaser might do with a particular property, but it will be necessary to give this point serious consideration. The OIO and the Ministers are likely to give greater weight to development benefits where an overseas person can show clearly and concisely (for example by reference to market data) that a New Zealand purchaser is unlikely to carry out the same developments.

The OIO has recently circulated some new forms to advisors involved in OIO applications, being a Vendor Information Form and an undated Required Information Checklist. These forms further emphasise the importance the OIO is placing on getting information that allows them to properly assess the likely counterfactual scenario.

The new forms are available on the OIO's website and from our office.

Duncan Cotterill's expertise in overseas investment transactions and our history of successful applications with the OIO is testament to our applied knowledge of the Act, and our ability to understand the specific needs of our clients combined with the foresight required to plan submissions in a manner that mitigates issues arising. Our team has the understanding required to ensure the average finalisation timeframes of our comprehensive submissions are well below the national average, meaning our clients save valuable time and costs due to minimal delays and alterations. These factors are a major contributor to our continued increase in referred business within the overseas investment arena.


1 The vendor had received indicative bids from 2 New Zealand investors. While it is not clear from the Recommendation Report, as some detail has been redacted, Pure 100's submissions on the counterfactual suggest that the Stevenson Group had indicated that it would not have accepted either of those indicative bids if Pure 100's application was declined.

2 Under powers delegated by the responsible Ministers, the OIO has the power to make final decisions on some OIO applications. For non-delegated applications, the OIO issues a Recommendation Report to the responsible Ministers, who are responsible for making the final decision.

3 While the Ministers agreed with the OIO's assessment that some other factors in the Act and Regulations had been met, those other benefits were considered to be modest in size such that they were not considered substantial.

4 The exact amount of capital investment allocated to the conversion of the forestry block and the wilding pines to pasture was redacted from the Recommendation Report released to the public by the OIO. However, it was disclosed that the OIO considered that with the investment there would be approximately $3,044,530 more investment for development purposes (including the conversion and the increased investment in the new farm manager's house) than without the investment.

5 The 379 hectares of land being converted to pasture represents just 2.74% of the total land area, and the introduction of $3,044,530 for development purposes represents just 3.46% of the total purchase price.

6 The OIO would likely require a high degree of certainty for this factor, as it is not able to impose conditions on a vendor after a sale.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.