COVID-19 | Changes to foreign investment framework – implications for the commercial leasing sector

Introduction

Effective from 29 March 2020, the Australian Treasurer introduced changes to the foreign investment framework which included the reduction of the monetary screening thresholds for foreign investments in Australia to $0.

For information about how the new measures will impact on investments generally, see our previous article on the topic.

Do commercial leases require FIRB approval?

While it has always been the case that FIRB approval was required for certain commercial leases of non-exempt land to a foreign person (the term ‘foreign person’ is broadly defined in the Foreign Acquisitions and Takeovers Act 1975 (Cth)), from our recent discussions with landlords and tenants, it is evident that many are unaware that a foreign person taking a lease of commercial property in Australia may require the approval of the Foreign Investment Review Board (FIRB).

Given the recent changes, unless an exemption applies, FIRB approval will now be required for all leases of commercial land where the tenant is a foreign person and at the time the lease is entered into the term of the lease (including any extension or renewal) is reasonably likely to exceed five years.

In the case of:

• Vacant commercial land (or developed commercial land being leased to a foreign government investor): The monetary screening threshold was already $0 prior to the new measures and FIRB approval will continue to be required in these instances.
• Developed commercial land to a foreign person: The notification thresholds of $275 million or $60 million (depending on the circumstances) previously meant that FIRB approval wasn’t a consideration for the vast majority of leases (except in the case of a foreign government investor in which case notification was required).  With the reduction of these thresholds to $0, the new measures mean that a significant time, cost and compliance burden will now be placed on tenants entering into leases (including subleases and variations to existing leases) with a term of more than five years.

Agreements for lease

Entry into an agreement for lease is considered to be an acquisition at the time the agreement is entered into.  On this basis, entry into an agreement for lease by a foreign person will also require FIRB approval where the resultant lease is likely to exceed five years.

In the case of an agreement for lease:

• entered into before 29 March 2020; and
• in respect of which FIRB approval was not then required or obtained,

it is not clear if FIRB approval will be required when the resultant lease commences.  On the basis that the acquisition of land occurs when the agreement for lease is entered into, it is arguable that FIRB approval will not be required for the resultant lease coming into operation pursuant to the pre-29 March 2020 agreement for lease.  However, a prudent tenant may nonetheless elect to apply for FIRB approval in these circumstances.

We will continue to monitor government announcements in this regard.

Application fees

The fee to apply for FIRB approval will depend on the lease payments over the term of the commercial lease.  If total payments over the term do not exceed $10 million, a $2,000 application fee will apply.  If total lease payments exceed this amount, the application fee will likely be $26,200 (or $105,200 if total lease payments exceed $1 billion, which would be unusually high).

Implications

It is important that both landlords and tenants are now aware of the changes, which in addition to the reduction to the monetary screening thresholds include possible delays of up to 6 months while an application for FIRB approval is being processed.

Landlords should consider including a warranty in their leases and agreements for lease that FIRB approval is either not required or otherwise has been obtained.

If you require advice about how the measures may affect your proposed lease, our Property team is well placed to assist.   We are here to help and invite you to contact our office should you require any assistance.

For details of all our COVID-19 tips and updates, visit the Gadens COVID-19 Hub.

Authored by:

Sean Huggins, Special Counsel
John Darmanin, Senior Associate
Roberta Tabakova, Lawyer