Leases And Licences Under The Foreign Acquisitions And Takeovers Act 1975 (Cth) – An Analysis Of Commonly Mistaken Concepts

Acquisitions in an ‘interest in Australian land' by a foreign person may be conditional on the Treasurer issuing a no-objection notification (FIRB Approval).

Interest as lessee or licensee (Tenant Co) in a lease or licence giving rights to occupy Australian land may be considered as an ‘interest in Australian land' if the term (including any extension or renewal) is reasonably likely, at the time the interest is acquired, to exceed 5 years.

What is considered an ‘extension or renewal' for the purpose of the Foreign Acquisitions and Takeovers Act 1975  (Cth) (FAT Act)? When is the Tenant Co required to submit an application for FIRB Approval? See below.

‘Interest in Australian land'

Pursuant to section 12 of the FAT Act, ‘interest in Australian land' includes an interest as lessee or licensee in a lease or licence giving rights to occupy Australian land for a term that is or is reasonably likely, at the time the interest is acquired, to exceed 5 years. This includes any extension or renewal of the lease or licence.

Licence to occupy Australian land

In common leasing transactions, a licence to occupy the premises is usually granted in the form of either:

1. a fitout and early occupation deed; or
2. an agreement for lease (AFL) that contains early access for fitout and early occupation provisions.

From a practical perspective, a licence granted solely for the purpose of fitout and early occupation is reasonably unlikely to be over 5 years and therefore will not fall within the scope of the FAT Act.

However, if the licence is entered into for more substantial events such as subdivision or consolidation of land or completion of infrastructure projects, the term may be over 5 years and in this case, FIRB Approval may be required.

It is worth noting that subdivision or consolidation of land will generally result in the creation of new titles and acquisition in a new interest in Australian land. The Tenant Co may therefore need to obtain further approval from the FIRB on the new acquisition.

Whether a licence term will reasonably likely be over 5 years depends on each transaction's circumstances. It may be necessary to consult with other stakeholders in the transaction on the realistic timing of satisfaction of each event which impacts the term, including potential delays.

Is the continuation of occupation of premises an ‘extension' of the term?

If the licensee under a licence continues its occupation of the premises on commencement of the lease as a lessee and the term of the licence and the lease together exceed 5 years, does that continuation constitute an ‘extension' for the purpose of the FAT Act?

The short answer is no. This answer still applies even if the licence is in the AFL which also grants the lease.

In the absence of provisions in the FAT Act to suggest otherwise, our understanding is that:

1. the FIRB views entry into each document as a separate action and not an ‘extension' of term under section 12 of the FAT Act. This position is also supported in the FIRB's Guidance Note 2 – Key Concepts (GN);
2. acquisition of an interest under a licence is unlikely to be subject to FIRB Approval unless the licence is for the purpose of more time-consuming events beyond 5 years, for reasons explained above; and
3. although FIRB Approval is not usually required for an acquisition of an interest in a licence, the Tenant Co may still be required to obtain FIRB Approval at the time of entry into an AFL for reasons explained below.

When is the acquisition made and when is FIRB Approval required?

In the various examples given in the GN, it is clear (and a good reminder for lawyers) that:

1. entry into a lease subsequent to a licence for the same premises is not considered an “extension” of the term;
2. if provisions to acquire the leasehold interest are conditional on the occurrence of an event or events within the meaning of section 15(5) of the FAT Act, then the acquisition will only be taken to occur when those provisions become binding on the parties. If there is more than one condition precedent, then the acquisition will be taken to occur on satisfaction of the last condition. This means that FIRB Approval must be obtained before all the conditions precedent are satisfied and it is common to have FIRB Approval as one of the conditions precedent;
3. if the AFL is unconditional and a lease for a term of over 5 years is entered into subsequently pursuant to the terms of the AFL, then the acquisition is taken to have occurred at the time of entry into the AFL pursuant to section 15(1) of the FAT Act and FIRB Approval is required at the time of entry into the AFL. Ideally, such an AFL should have as a condition precedent to the operation of the AFL and the granting of the lease the obtaining of FIRB Approval;
4. if FIRB Approval is obtained at the time of entry into the AFL, the Tenant Co is not required to obtain a separate approval on entry into the lease unless new titles are created for the premises and those new titles are not part of the FIRB Approval; and
5. a material alteration or variation of lease is considered as entry into a new agreement pursuant to section 25(1)(b) of the FAT Act and may trigger FIRB Approval. An extension in term may be considered a material alteration or variation of lease.

It should be noted that:

1. FIRB Approval is only required if the transaction consideration also exceeds the monetary threshold. As at the date of this article, the monetary thresholds for the acquisition of land which is commonly subject to leases are as follows:
   
   

   Investor	Action	Current threshold
   All investors	National security land	$0
   	Vacant commercial land	$0
   Private investors from certain FTA partners	Developed commercial land	$1,427 million (sensitive land may have a lower threshold)
   Private investors not from certain FTA partners		$330 million (sensitive land may have a lower threshold)
   Foreign government investors – see point 2 below		$0

   
   
   
2. An individual or corporation that is an agency or instrumentality of a foreign country or part of a foreign country, and is not part of the body politic of a foreign country or of a part of a foreign country is a ‘separate government entity' (see section 4 of the FAT Act). ‘Interest' may be in the form of shares or control of the voting power or potential voting power in the Tenant Co (see section 17 of the FAT Act). This means that whilst the Tenant Co may occupy the premises under the licence (unless the licence itself is subject to FIRB Approval), it may not do so under the lease until FIRB Approval is obtained.

Key takeaway

This is a reminder to transaction advisers acting for Tenant Co and tenants that are a foreign person, particularly foreign government or foreign government investors given its acquisition threshold is $0, that careful consideration must be given to the FAT Act, in particular sections 15 and 25, before entering into any lease or licence and in structuring any lease transaction.

Overall, where commercially appropriate, foreign Tenant Cos should consider:

1. if possible, entering into transactions that are for a term equal to or less than 5 years unless the benefit of obtaining a FIRB Approval for a longer term outweighs the costs and time to do so;
2. consult with relevant stakeholders before entering into a lease or licence for complicated transactions to determine whether the term will “reasonably likely” be more than 5 years from a practical perspective;
3. consider mirroring conditions precedent in the AFL to the Lease, if commercially possible, to prevent risks of breach of the FAT Act; and
4. if subdivision or consolidation of land is a condition precedent to the transaction and FIRB Approval is required, ensure that the FIRB Approval addresses both existing and new titles to avoid the need to submit a separate application for FIRB Approval.
5. once an application for FIRB Approval is submitted, the Tenant Co is restricted from taking the action to which the FIRB application relates until a decision is made by the Treasurer under section 82 of the FAT Act. This applies even if the action is a reviewable national security action that is not subject to compulsory notification to the FIRB.
6. the threshold of $0 applies to both foreign governments and foreign government investors (see reg 52(1)(d) of the Foreign Acquisitions and Takeovers Regulation 2015  (NSW) (FAT Reg)). If at least 20% ‘interest' in the Tenant Co is owned by a foreign government or separate government entity, or at least 40% ‘interest' is owned by foreign governments or separate government entities of more than one foreign country, that Tenant Co will be considered as a ‘foreign government investor' (see reg 17 of the FAT Reg).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.