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COVID-19 and New Foreign Investment Review Board Requirements for Commercial Leases

Posted by Andrew Grima on 28 May 2020

The most recent past……

On top of the plethora of COVID-19 related rental relief measures that have been adopted by the Commonwealth, States and Territories over recent weeks, it is easy to overlook the new changes relating to the Foreign Investment Review Board (FIRB) notifications for commercial leases.

Over the years, it has only been in rare matters that a party entering into a commercial lease need bother with the FIRB.

However, on 29 March 2020, the Treasurer announced that as a result of the impacts of the COVID-19 pandemic, there are now new thresholds for the purposes of screening commercial leasing transactions.

First some terminology…

Under the Foreign Acquisitions and Takeovers Act 1975 (“Act”), a foreign person is defined to include:

  • an individual who is not ordinarily a resident in Australia; or,
  • a corporation in which an individual is not ordinarily a resident in Australia, a foreign corporation or a foreign government holds a substantial interest.

A substantial interest under the Act means an interest of at least 20% in the corporation.

Prior to COVID-19

Prior to 29 March, 2020 unless rent being paid by a foreign person exceeded an extremely high threshold, or where a party is leasing a vacant block of land, FIRB was generally not required to be notified.

However, as a result of regulations that were introduced in April, if a foreign person enters into a commercial lease for a term of more than five years, they will be required to notify the FIRB approval irrespective of the amount of rent paid. The term includes any option to renew after the initial expiration of the initial term.

Negotiations commenced before 29 March 2020

The difficult question arises where a party has commenced negotiations prior to 29 March 2020, or where a party is exercising an option to renew.

The FIRB guidelines note that if there is a pre-existing agreement entered into before29 March and certain conditions have not yet been satisfied, then provided the negotiations have been completed and the parties have reached agreement on all the essential terms of their agreement, then it is likely that FIRB will not need to be notified.

An example may be a Heads of Agreement that has been entered into. The parties would need to look at those Heads of Agreement very carefully before concluding that this is a pre-existing agreement, in order to avoid the need to notify FIRB. If you have any doubts and want to be safe, if you then enter into a more formal commercial lease after 29 March then you should notify FIRB.

Where a party has exercised an option to renew, this is likely that they are not required to notify FIRB when the lease that is entered into pursuant to that exercise of the option is entered into, given that the agreement to enter into that further term was made when the initial lease was entered into.

The process

The process for notifying FIRB will seem daunting to the uninitiated, but ultimately, will require providing information on the lease, details of your company’s structure, and an application being completed on an online portal.

There will also be an upfront fee that will need to be paid. There is likely to be delays in obtaining approvals – historically, it took one month for an application to be reviewed but that time frame has been pushed out to six months. FIRB has indicated they will do everything they can to process applications quickly, but the reality is if there are going to be more applications than normal, then you can expect delays. 

There does not seem, at this stage, to be any indication as to how long these changes will last.

What is critical at this time is to ensure that if you are now entering into a lease and you have concerns that you will fall under the FIRB guidelines, that the lease is made conditional upon FIRB notification and confirmation of approval.

If you need any guidance on any of the above discussed items, please do not hesitate to get in touch with a lawyer in Coleman Greig’s Commercial Property team, who would be more than happy to assist you today.