Munro Leys analysis: 'The drafting of the new law is in places confusing and ungrammatical....The new legislation is poorly thought out and even more poorly drafted. It has the potential to confuse developers and investors in residential property. Its current legal, administrative and economic consequences mean that changes to it are inevitable. However that only increases the uncertainty for investors in the meantime. More ominously, however, is our offshore client feedback in the week since the Act came into effect. Generally clients are less interested in the detail of the law than the general signal that these changes send out about Fiji’s attitude to foreign investment. This, too, will have consequences."
Land Sales (Amendment) Act 201422 December 2014
Introduction
1. On 27 November 2014 we issued a Legal Alert on proposed amendments to the Land Sales Act in Bill No. 13 of 2014. This bill was withdrawn after a strong public reaction. However Bill No. 28 of 2014 (now Act No. 16 of 2014) was then enacted, with virtually no parliamentary debate and no public consultation, on 11 December 2014. A copy of the Act is attached.
2. The drafting of the new law is in places confusing and ungrammatical. It appears to correct some of the problems in Bill No 13. However potentially serious consequences remain for developers, financiers and current owners of freehold and State (ie Crown lease) land. In particular, virtually any non-resident who buys or currently owns vacant residential land in Fiji will be required to complete construction on it within two years, or face continuing monetary penalties of 10% of the value of the land (or fines of up to F$100,000).
What the amended Act will do
Non-residents cannot buy freehold or residential State land within city/town boundaries
3. The Act now states that freehold or State land for “residential” purposes within the boundary of any town or city declared or extended under the Local Government Actshall not be sold, transferred or leased to a non-resident. [s.7A].
4. Interests in iTaukei/Native leases (or subleases under them) remain unaffected.
5. The above is the starting point, subject to a number of exceptions. Non-residents may still buy, take, transfer or lease residential freehold or State land within city/town boundaries for:
(a) the acquisition of “strata” or unit title (essentially, apartments, though see the definitions at paragraph 13 below)
(b) “industrial or commercial” purposes
(c) residential purposes within an integrated tourism development[1] or
(d) operation of a hotel.
However in every case, they must build on the property within two years or face monetary penalties (see paragraph 10 below).
Further exceptions
6. The restrictions do not apply to:
(a) a tenancy for a term of less than 5 years to a non-resident (a relief to the expatriate community, who lease homes in city areas)
(b) sale, transfer or lease of property to a non-resident immediate family member
(c) gifts or bequests to a non-resident and
(d) sale agreements entered into before 21 November 2014 if they complete before 31 March 2015.
However, these transferees may still have obligations to complete building on vacant land within two years (see paragraph 10 below).
Issues for current owners
7. Current non-resident owners of vacant lots within or outside of town/city boundaries are required to complete construction of a new residential dwelling, with a minimum expenditure of F$250,000, by 31 December 2016.
8. A non-resident owner unable to complete construction within this deadline must pay a fixed monetary penalty for every six months of non-compliance (refer paragraph 10 below). This penalty is continually payable to the Government until construction is completed.
New owners
9. A non-resident who acquires vacant land – wherever he or she acquires it – is required to complete construction on that land within two years of acquiring it, or face the fixed penalties (referred to in paragraph 10 below).
Fixed penalties
10.Section 7A(7) of the Act now imposes fixed penalties in this way:
(a) in respect of a non-resident to whom vacant freehold or State land was sold or leased, 10 per cent of the price at which the vacant freehold land or State land was sold or leased or
(b) in respect of a non-resident to whom vacant freehold or State land was “transferred” -10 per cent of the value of the land.
Given that land is “transferred” to everybody, presumably (b) is meant to cover transfers other than by way of sale or lease, but this is not clear. There is no clarity on how these monetary penalties will be imposed, collected or enforced.
Offences
11. Any person who breaches section 7A may be fined up to F$100,000 on conviction. As the law is drafted, this might include a person who sells land protected by the Act to a non-resident. Potential vendors will therefore need to undertake some due diligence before entering into a sale agreement.
Definitions
12.The definition of a “resident” has been expanded and now means:
(a) an individual who is a Fiji citizen or
(b) a company where the controlling interest is held by Fiji citizens.
(c) a trust, if the trustee is a Fiji citizen with a minimum of 15% of the beneficial interest in the income of the trust estate
(d) a financial institution licensed by the Reserve Bank of Fiji, or
(e) a foreign government or international or multilateral organisation.
13.There are also definitions for:
(a) “construction” meaning construction of a new residential dwelling which incurs building costs not less than $250,000.
It is not clear whether this includes or excludes VAT.
(b) “strata or unit title”. The definition is broad (it appears to be taken from Wikipedia) but it does not cross-refer the Fiji Unit Titles Act.
The general rule (?)
14. Therefore, it appears, non-residents:
(a) can continue to own residential freehold or State land they currently own within town/city boundaries and:
(i) if the land is built on, no immediate issues arise
(ii) if the land is vacant, they must complete construction on it by 31 December 2016 or face monetary penalties
(b) cannot now acquire freehold or State residential land within town/city boundaries
(c) can acquire residential land outside town/city boundaries, but they must complete construction on it within 24 months of acquisition or face monetary penalties
(d) can acquire leases in native/iTaukei land anywhere without consequences.
However there are exceptions to this general rule.
Effects of the amended Act
15.Unintended consequences are a hazard of most poorly-drafted legislation. In this case the public has had no opportunity to highlight them to the Government before enactment. On a quick first reading, however:
(a) developers of vacant freehold or State land within or outside municipal boundaries still stand to lose their target market because of the onerous obligation to build within 24 months. There is currently no flexibility to extend time
(b) banks will have to carefully evaluate all lending to non-residents to buy vacant land or build on it because of the risks that building deadlines will not be met and the effect of imposition of monetary penalties on their borrowers
(c) Fiji builders are not famously punctual and work that rushes to meet a deadline (presumably the requirement to complete means substantial completion, though this is not specified) may be substandard, with longer-term consequences
(d) there may be a short-term opportunity for cashed-up Fiji residents to acquire vacant land from nervous non-residents. However doubts about longer-term values – because the market is driven by non-resident demand – may make even Fiji resident buyers cautious
(e) non-residents currently holding vacant freehold or State land need to decide whether to hold the land (and plan to build residential dwellings) or sell – or resort to “workarounds” (see below).
“Workarounds”
16. The legislation is poorly thought through and leaves itself open to obvious “workarounds”. For example:
(a) it is relatively easy to create a “resident” trust which qualifies to hold the land (the reasons for the current definition appear to defy explanation)
(b) lease arrangements may be available in some cases to avoid monetary penalties for delays in construction. In this way, a non-resident may suffer a penalty every six months for not completing construction, but only for 10% of a nominal rent, not the sale price
(c) enterprising non-resident purchasers might request that their vendors build a token structure on vacant land before it is sold (or leased) to them. A resident vendor is not bound by the $250,000 rule in terms of construction (nor is a non-resident who sells his or her land before 31 December 2016). This will mean that the land is not “vacant” when it is transferred to the non-resident purchaser.
There are numerous other lawful mechanisms which non-residents can employ which may blunt the worst effects of the Act – but which will increase the complexity, costs and risks of their investing arrangements in Fiji.
Conclusion
17. The new legislation is poorly thought out and even more poorly drafted. It has the potential to confuse developers and investors in residential property. Its current legal, administrative and economic consequences mean that changes to it are inevitable. However that only increases the uncertainty for investors in the meantime.
18. More ominously, however, is our offshore client feedback in the week since the Act came into effect. Generally clients are less interested in the detail of the law than the general signal that these changes send out about Fiji’s attitude to foreign investment. This, too, will have consequences.
Contact
19. Contact any Munro Leys partner Richard Naidu, Jon Apted or Nicholas Barnes to discuss further.
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[1]The definition of integrated tourism development is not clear and there is no clear means of ascertaining whether a development complies with the definition or not. However few such developments are within city or town boundaries anyway, so the exception is mostly redundant.
