Temporary foreign investment framework measures and COVID-19 - what does this mean for commercial landlords and tenants?

In brief - effective from 29 March 2020, new measures have been introduced by the Federal Government to amend the framework governing Australian foreign investment

The Foreign Acquisitions and Takeovers Amendment (Threshold Test) Regulations 2020 (the Regulations) reduced the Foreign Investment Review Board's (FIRB) monetary screening thresholds to $0. Generally speaking, this means that all actions by foreign persons acquiring interests in Australian securities, assets, land or businesses are now subject to FIRB approval, regardless of the value of the transaction. 

For landlords and tenants specifically, the effect of the Regulations is that leasing transactions which were not previously captured by the requirement to obtain FIRB approval will now be subject to FIRB's scrutiny. 

Leases 

While it has always been the case that entry into certain leases by a 'foreign person' (as is defined in the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA)) has required FIRB approval, prior to 29 March 2020 a foreign person was only required to notify FIRB and to obtain a 'no objection' letter before entering into a lease of Australian developed commercial land if:

• the term was likely to exceed 5 years; and 
• the aggregated rent payments over the term of the lease were in excess of $275 million or $60 million if the land was categorised as 'sensitive land' (such as mines, airports and ports, as examples). 

The acquisition of a leasehold interest in vacant commercial land has always been subject to a $0 threshold and this will not change under the temporary Regulations. 

Under the temporary Regulations, all acquisitions by foreign persons of a leasehold interest in land (whether the land is vacant land or developed land) will require FIRB approval where: 

• the term of the lease, or the likely term is to be equal to or more than 5 years; and 
• regardless of the 'value' of the acquisition. 

The 'value' of the acquisition of a leasehold interest in Australian land refers to the aggregated rental and other ancillary payments (such as car parking licence fees or fees associated with the extension, or renewal of the lease) required under the lease over its term. The term of the lease includes the initial term as well as any option, or right of renewal where that right is incorporated into the terms and conditions of the grant of the initial term. 

Agreements for lease

An agreement for lease and a lease are treated as separate actions for the purposes of FATA. 

The practical effect of this is that a tenant who is a foreign person with an existing approval in relation to an agreement for lease (or who has an agreement for lease which did not require an approval) will also need to obtain a FIRB approval in relation to the resulting Lease, unless: 

• the lease has a term of less than 5 years; or 
• the agreement for lease and the lease are both specified in the existing 'no objection' letter and are entered into within the period specified in that letter. 

Entry into an agreement for lease is considered to be an acquisition of an interest in land at the date that it is entered into. Therefore, tenants entering into these agreements should have pre-approval by FIRB, or the agreement for lease should be expressed as being conditional upon FIRB approval being obtained. 

When must FIRB approval be obtained?

FIRB approval must be obtained by a tenant who is a foreign person prior to entering into the lease or agreement for ease, or the lease or agreement for lease becoming unconditional. The potential penalties for a tenant failing to obtain an appropriate FIRB approval are discussed later in this article. 

What about Leases that have been renegotiated due to COVID-19?

The FIRB's Guidance Note 53 provides some valuable guidance on when a re-negotiated lease will require FIRB approval. In the current climate, particularly considering the newly released Code of Conduct for commercial tenancies and the state and territory based regulations relating to commercial and retail leases, it is likely that many landlords and tenants will be entering into re-negotiations of the terms of their leases over the coming months. 

FIRB has advised that where the tenant is a foreign person and the negotiations result in: 

• Rent being reduced, deferred or delayed, particularly in relation to re-negotiations which arise as a result of the COVID-19 crisis, and such changes are temporary in nature, then these rental changes would not be considered to be a 'material variation' to the lease and, therefore, would not give rise to a 'notifiable' event occurring (i.e. no FIRB approval is required);
• The term of the current lease being extended (for example, the landlord agrees to a reduction in rent in exchange for an extension of the term by 2 additional years), a change to the term does represent a 'material variation', and the tenant will need to consider whether the variation means that the term of the lease is reasonably likely to exceed 5 years (including any options). In these circumstances, FIRB will take into the account the remaining term of the lease (not the expired term). Where the remaining term is likely exceed 5 years, FIRB approval should be obtained; and 
• A surrender of the current lease and entry by the parties into a new lease, then the tenant will need to consider whether the term of the new lease is reasonably likely to exceed 5 years and if so, then FIRB approval will be required in relation to the new lease. 

Fees

The fees associated with making an application for FIRB approval in the context of a lease are calculated by reference to the 'value' of the lease or the consideration payable under the lease over its term. The consideration refers to the total rental and other ancillary payments required under the terms of the lease over the term of the lease. 

If the consideration does not exceed $10 million, the application fee is $2000. If the consideration exceeds $10 million, the application will attract a fee of $26,200 and if the consideration exceeds $1 billion, the application fee is $105,200. 

Time periods for applications and approvals 

The government has extended the statutory timeframes for reviewing all forms of applications (not just leasing transactions) from 30 days up to 6 months. This time period commences on the date that the application fee is paid to FIRB. The extension of the statutory approval period has been implemented to allow FIRB the time to assess the greater volume of applications that will be received as a result of the reduced monetary threshold. The government has advised that it will continue to prioritise urgent applications for investment that will protect and support Australian business and Australian jobs. 

From a practical perspective, both landlords and tenants must be aware that these extended statutory timeframes have the potential to substantially delay entry into a deal, or delay a deal becoming 'unconditional' until FIRB approval is issued. 

I am a landlord, what should I be aware of?

We recommend that landlords consider including a warranty in their leases which provides that the tenant has either obtained FIRB approval, or is not required to obtain FIRB approval and indemnifies the landlord for any losses associated with a breach of that warranty. 

From the outset of negotiations, landlords should make themselves aware whether a prospective tenant is required to obtain FIRB approval and should also be aware of not only the wider application in respect of lowered monetary thresholds, but of the extended time periods associated with tenants obtaining the required approval. 

I am a potential tenant, what should I be doing?

Any potential tenants should, in advance of any leasing transaction, take the time to assess whether they are in fact a foreign person and will require FIRB approval to enter into a lease or agreement for lease. Any foreign person who intends to enter into a lease, an agreement for lease or intends to vary their current lease (so that the remaining term is five years or more), will need to make an application to FIRB. 

The Treasurer will either approve the action by issuing a 'no objection' letter, approve the action subject to conditions or restrictions, or prohibit the action in its entirety. Tenants who are issued with a prohibition to enter into the transaction will not be able to proceed with the desired lease or agreement for lease. 

Tenants can enter into a lease or agreement for lease which is conditional upon receiving FIRB approval prior to the agreement becoming unconditional, but in some cases tenants can also pre-empt the need for a FIRB approval by applying for an exemption certificate. This prequalifies them to enter into certain transactions (subject to that transaction complying any conditions set out in the certificate). 

If a tenant is a foreign person, they might consider making an application for an exemption certificate to avoid delays in the leasing process, and to improve its comparative attractiveness to landlords in light of the potential delays in obtaining an approval brought about by the Regulations. Exemption certificates are not available to all applicants and all transactions, however, a prospective tenant should consider whether its intended activities qualify the tenant to make an application for an exemption certificate. 

Failure on behalf of a tenant to obtain the necessary approvals by the date that the foreign person enters into an unconditional lease or agreement for lease, (or a conditional lease or agreement for lease becoming unconditional) could result in the tenant being subject to criminal prosecution, civil penalty orders or infringement notices under the FATA. Penalties can be substantial and will vary depending on whether the foreign person is a natural person, or a company.