Temporary FIRB changes during COVID-19 – impact on commercial leases
In this historically challenging time for the Australian economy, the Government announced new Foreign Investment Review Board (FIRB) temporary measures, effective from 10:30pm on 29 March 20201, in pursuit of protecting the national interest.
Under this change, all thresholds which usually apply under the FIRB Act for determining whether the framework applies, have been replaced with $0. This is a significant change for both landlords and tenants in the commercial leasing sector. So, does this apply to you?
The FIRB framework applies to leases of Australian land that (including any options terms) are reasonably likely to exceed five years where the tenant is a foreign entity. This will apply to many lease agreements nationwide. Given that the notification threshold for developed commercial land (being the total monetary value of the costs of a lease within a building) has now dropped from either $275 million or $60 million depending on the type of transaction, to $0, it is now the case that approval will be required for all leases that exceed a term of five years. This must be obtained by the tenant prior to entry into the lease.
Agreements for lease
In respect of an agreement for lease, as typically these apply to undeveloped commercial land which already has a $0 notification threshold, we have already been applying for FIRB approval in most instances. However, now that the $0 notification threshold flows through to all situations, FIRB approval will be required for Agreement for Leases, even where the premises are constructed, where the term under the lease is reasonably likely to exceed five years.
What is now required?
The 'acquisition' of a lease of Australian land, by a foreign entity tenant, exceeding five years, regardless of whether it is in relation to vacant or developed commercial land and regardless of the value of the lease, will now satisfy the 'significant action' test and require FIRB approval.
The Treasurer can approve the action by issuing a no objection notice, prohibit the action or approve the action but impose conditions. The Government has advised that when reviewing an application and considering conditions to impose, it will be mindful of the potential impact on the community and employment.
FIRB has confirmed that there is not yet any policy for waiver or reduction of the usual application fees. The application fees are based on the highest land value (i.e. the lease payments over the term). An application for total lease payments over a term not exceeding $10 million will require a $2,000 application fee. If total lease payments exceed $10 million, the application fee jumps to $26,200.
What if you don't notify FIRB?
A foreign entity tenant must apply to the FIRB before entering into a lease. If you are a landlord, we suggest reviewing your current or upcoming leasing proposals to ascertain if any tenant entities may be caught by this. If you are a tenant, it is important you understand whether or not you are deemed a foreign entity and will be caught under this scheme. We can provide assistance with these queries.
The statutory time period to obtain approval is to be extended from 30 days to up to six months from the date of payment of the application fee (the case officer will discuss this once an application is made). This is important as there may now be a significant delay due to the influx of applications. Requests can be made for urgent attention to an application if it has commercial imperatives (i.e. a contractual obligation to obtain with a certain timeframe) or broader economic impacts.
If a tenant does not notify the FIRB of the interest, ultimately, they could be liable for a civil penalty or committing an offence under the Foreign Acquisitions and Takeovers Act 1975.
If the Treasurer does not approve the application, the acquisition of the interest in the lease cannot proceed. Accordingly, all new lease proposals and agreements should contain a subject to FIRB approval condition.
Australia still continues to welcome foreign investment, which is vital to long-term economic success and stability. The Government advises the purpose of these amendments is to provide visibility of all foreign investments made during this crisis and ensuring those investments are not contrary to the national interest. FIRB will prioritise applications to ensure that investments which support the national interest are not unnecessarily delayed.
The FIRB website confirms that these new measures do not apply to agreements entered into prior to 10:30pm AEDT on 29 March 2020, including in relation to acquisitions that have not yet occurred, regardless of whether there are unmet conditions or not.
We are continuing to monitor this closely as with the evolving nature of COVID-19 changes are being announced daily. We reiterate these are only announced as 'temporary' measures that will remain in place during the coronavirus crisis. However for now, all new lease agreements entered into after 10.30pm on 29 March 2020 will require adherence to this new process and, as mentioned above, should include a clause where the lease is subject to FIRB approval. Please do not hesitate to reach out if you require any assistance, we are experienced in this field and ready to assist where necessary for your business.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.