With 20 employees, the family farm included Peter's son William and Peter's daughter Trudy, who managed the farm with her partner James.
"This is an exciting development for the industry and of course, for us," Peter said.
Consumers were becoming more interested in the welfare of the birds they got eggs from, he said.
The Otaika farm is part of the Independent Egg Producers co-operative and the Sandles are already expanding to include the Sancra Farms in Rotorua, which would start with 25,000 birds when it became operational in October and have capacity to grow to 100,000.
The free-range egg farm in Hamurana would create 20 jobs there.
McDonald's NZ managing director Patrick Wilson said the decision to move to free range signalled a "commitment to the ongoing evolution of this business".
"We realise there's always room to improve, and by moving away from eggs from caged hens we're doing what our customers have asked us to do. Questions about free-range eggs have been one of the most popular queries sent to us through the Our Food, Your Questions website, which launched at the end of 2013."
Once McDonald's had fully transitioned, free-range eggs bought by the company would make up about 9 per cent of all such eggs sold in New Zealand.
He said McDonald's would be "investing significantly in new farms and farming systems".
"This is why the rollout will happen over 18 months - it needs to be sustainable for our suppliers," he said.
Wilson confirmed Otaika Valley Free Range Eggs would be increasing its supply of free-range eggs to McDonald's.
McDonald's New Zealand's free-range egg supply would be independently audited, with farms adhering to the Animal Welfare (Layer Hens) Code of Welfare 2012, Wilson said.
The number of eggs being used by McDonald's was expected to increase following the national rollout of the gourmet burger Create Your Taste range, McDonald's New Zealand-new gourmet burger offering.
