Foreign investment traps

LPLC regularly receives inquiries from practitioners about foreign investment. Most of them concern foreigners buying real estate in Australia.

Since 2010 there have been six claims relating to foreign investment laws. Based on the claims notified to LPLC there are three reasons claims arise:

• not asking the client whether they are a foreign person;
• not knowing the relevant law;
• trying to find a way around the statutory requirements.

The Foreign Acquisitions and Takeovers Act 1975 (Cth) imposes an obligation on any foreign person to seek approval by prior written notice of specified acquisitions, for example where a foreigner wishes to acquire a substantial interest in an Australian corporation and/or an interest in Australian urban land. See s26 and s26A. A “foreign person” is defined in s5.

The application needs to be made to the Foreign Investment Review Board (FIRB). More details are available at www.firb.gov.au.

The penalties for breaching the Act are quite severe. A fine of up to 500 penalty units may be imposed and/or imprisonment for up to two years.

Nominee needs FIRB approval

A practitioner acted for a foreign person who was to be nominated as the transferee by the original purchaser of an inner city apartment.

The client informed the practitioner that they resided in China.

The practitioner was not aware the nominee needed to obtain FIRB approval.

The nominee had agreed to pay the original purchaser an amount in addition to the contract price to cover stamp duty and other expenses that would be incurred by the purchaser. The agreement was contained in a deed of nomination. When the nominee found out that they needed FIRB approval and neither the deed nor the contract of sale contained a clause making them subject to FIRB approval, they got cold feet and withdrew.

The disappointed original purchaser threatened to sue the practitioner who acted for the nominee for the loss of the bargain. While this allegation was spurious it does show the importance of recognising and dealing with issues involving the FIRB promptly.

Check federal and state laws

A practitioner documented a joint venture to develop land in Queensland for a corporate purchaser. The land had been acquired by the client before instructing the practitioner and the client’s in-house counsel acted in the purchase of the land.

About one year after receiving instructions the practitioner discovered through media coverage that the client was a foreign person for the purposes of the Foreign Acquisitions and Takeovers Act 1975 (Cth) and sought instructions to obtain a retrospective approval from the FIRB. However, no steps were taken to comply with the state reporting requirements pursuant to the Foreign Ownership and Land Register Act 1988 (Qld) because the practitioner assumed the in-house counsel would have known about the state law which required notice within 90 days of settlement.

Always ask your client whether they are a foreign person. This should be done when instructions are first received.

Review the notice requirements for foreign ownership including state and federal laws. For example, s27 of the Property Law Act 1958 (Vic) provides that only an “alien friend” may hold real and personal property in Victoria. For more information about s27 see the Victorian Law Reform Commission’s Review of the Property Law Act 1958: Final Report. advising a foreign person pre-contract:

• consider seeking instructions to obtain prior approval from the FIRB – this is commonly done where a foreign person wishes to bid at an auction;
• where prior approval is not obtained, advise your client any contract should include a special condition making the contract subject to FIRB approval.

When acting for a developer selling off-the-plan:

• consider the need to include a special condition in the contract of sale dealing with any foreign investment issues. For commercial reasons some developers may want a condition that provides for FIRB approval and some may want a warranty by the purchaser that no FIRB approval is required.
• determine at the outset whether the vendor wishes to seek prior approval from the FIRB to sell to foreign persons. Where a vendor has obtained prior approval, it is not necessary for individual foreign purchasers to apply for FIRB approval and a vendor may find it attractive as it may assist in selling to foreign people.

Where a practitioner discovers a breach of the Foreign Acquisitions and Takeovers Act 1975 (Cth) and/or any state laws about foreign ownership, they should advise the client of the consequences and inform the client they are obliged to give notice of the acquisition. In the event the client instructs the practitioner not to give the required notice the practitioner should terminate the retainer. Even where the retainer is terminated there is a view that the practitioner is still obliged to notify the relevant authority.

The FIRB website is a valuable source of information about foreign investment. The seven guidance notes and checklist for online applications are particularly useful.

See also the Foreign Acquisitions and Takeovers Act 1975 (Cth) and regulations.