Late last year, the Foreign Investment Review Board (“FIRB”) released revised guidelines to clarify the requirement of an open and transparent sale process for foreign purchases of agricultural land. This articles looks at the revised guidelines and the application of exemption certificates.
Foreign investors seeking to acquire an interest in Australian agricultural land must obtain FIRB approval if the foreign investor’s interests in the agricultural land exceeds a certain threshold value. For most foreign persons (excluding foreign government investors) in most countries the threshold value is $15 million.
Open and transparent sale process
FIRB approval is subject to the “national interest” test. In essence, FIRB’s job is to block foreign acquisitions that are not within the national interest.
The open and transparent sale process requirement is one part of this test.
In February 2018, FIRB announced that as part of its formal policy and guidelines, FIRB will consider whether agricultural land subject to a foreign acquisition has undergone an open and transparent sale process (“Sale Process Requirement”).
In order to satisfy the Sale Process Requirement, the agricultural land must be marketed publically through reasonably accessible channels such as national newspapers and widely used real estate listing websites for a minimum of 30 days before accepting a foreign bid. There must also be an equal opportunity for bids and offers from Australian investors.
The Sale Process Requirement originally applied to all investments in agricultural land by foreign persons, including acquisitions of leasehold interests and licences.
In September 2018, FIRB changed the Sale Process Requirement in response to stakeholder views. Guidance Note 17 and Guidance Note 21 provide that:
- The Sale Process Requirement will now only apply to sales of agricultural land intended to be used for a primary production business or residential development.
- The Sale Process Requirement will apply to freehold interests but not leasehold interests or licences unless they have freehold characteristics.
- Different forms of sale processes may be sufficient to satisfy the Sale Process Requirement provided that the applicant can demonstrate that the land was open to a level of Australian participation equivalent to the sale process suggested by the guidance notes (i.e. a 30-day public marketing campaign).
Foreign investors may be exempt from the Sale Process Requirement where the acquisition allows for significant Australian participation. This includes where:
- A proposal involves an opportunity for significant ongoing participation by Australian businesses in the operation of a primary production business on the land (for example, through a sale and long-term leaseback arrangement to an Australian investor).
- The foreign entity is majority Australian controlled (the majority of the shareholders in the foreign entity are Australian).
- The foreign entity is listed on the Australia Securities Exchange.
Exemption certificates allow foreign entities to make a series of acquisitions that would otherwise require individual FIRB approval. Exemption certificates are generally subject to certain limitations including:
- Timeframe (generally 3 years)
- Total acquisition limit (generally $100 million)
- Individual transaction limit (generally $10 million)
- Restrictions on geographical location of acquisitions.
FIRB will not grant exemption certificates unless it is satisfied that the foreign entity will make enough acquisitions to justify the exemption certificate. FIRB will not grant an exemption certificate to cover one or two transactions.
Acquisitions by foreign investors under exemption certificates are still subject to other FIRB requirements, such as the Sale Process Requirement.
Any foreign investor looking to make multiple acquisitions of agricultural land or land for residential development land may want to consider applying for an exemption certificate. In addition to the reduced regulatory burden, exemption certificates can be cost effective. An applicant will only be required to pay a single fee of $35,600 to apply for an exemption certificate (as opposed individual application fees, which depending on the value of the transaction may range from $2,000-$103,400).
Any foreign investor considering applying for an exemption certificate to cover a current acquisition, should ensure that the sale agreement factors in the potential delay due to obtaining FIRB approval. If an application for an exemption certificate is unsuccessful, the foreign investor will not be able to complete and settle under the contract. This may result in the foreign investor being in breach and defaulting under the contract.
Implications for foreign investors and vendors
Implications of the revised Sale Process Requirement arise both pre and post entering into a contract for the sale of agricultural land:
For foreign investors, the Sale Process Requirement represents an additional hurdle to overcome. It means that foreign investors must be more proactive and ensure any agricultural land they propose to acquire has been subject to the Sale Process Requirement. Foreign investors should ensure contracts contain appropriate Vendor warranties that the Vendor has complied with the Sale Process Requirement.
Vendors should be aware of potential FIRB obligations of foreign investors and will need to ensure the sale process is conducted in such a way that provides equal bidding opportunities for Australian investors if they are considering selling to a foreign person. Vendor may need to demonstrate to the foreign investor that the land was open to a satisfactory sale process.
Foreign investors are encouraged to ensure all contracts:
- Are subject to FIRB approval.
- Allow an appropriate timeframe to accommodate the FIRB application process, particularly where the foreign investor is applying for an exemption certificate.
- Require the Vendor to assist the foreign investor in providing any information FIRB may require as part of any application.
Vendors are encouraged to seek precise clarification of their obligations to provide information about the sale process so that they are not subject to excessive obligations at the request of the foreign investor purchasing the land. Where the foreign investor claims exemption from the Sale Process Requirement, vendors should also conduct their own due diligence to confirm whether the exemptions are applicable in order to avoid unnecessary delays.