Economic Crime (Transparency and Enforcement) Act 2022: finance aspects

• United Kingdom

• Banking and finance
• Real estate finance

31-03-2022

Overview

The Economic Crime (Transparency and Enforcement) Act 2022 (the “Act”) received Royal Assent on 15 March 2022. The Act introduces a new register of overseas entities (to be established and maintained by the UK Companies House) to log details of the beneficial ownership of overseas entities that own real estate in the UK. There is also a requirement to keep those details up to date on an annual basis. The new registration requirements will be brought into force by secondary legislation under the Act, at a date to be confirmed.

For details of the corporate and property aspects of the Act please read our briefing Economic Crime (Transparency and Enforcement) Act 2022: corporate and property aspects. This briefing focuses on the implications of the Act for finance transactions.

Terminology

Overseas entity = a legal entity governed by the law of a country or territory outside of the United Kingdom

Legal entity = a body corporate, partnership or other entity that (in each case) is a legal person under the law by which it is governed

Qualifying estate (England and Wales) = freehold estate in land or leasehold estate in land for a term of more than 7 years from the date of grant

Qualifying estate (Scotland) = heritable interests in land or leasehold interests recorded in the General Register of Sasines or registered in the Land Register of Scotland

Note that the Act also applies to real estate in Northern Ireland.

Existing property portfolios

Overseas entities that own UK real estate are not able to register with Companies House until the relevant sections of the Act come into force and the register is established at Companies House. However, those entities can start assembling the information that will be required so that they are ready to register once the system is up and running. A few points to note:

• Once the relevant sections of the Act come into force there will be a 6 month transitional period for UK property owning overseas entities to register the required beneficial ownership details at Companies House.
• The registration requirements apply to:
  • qualifying estates in England and Wales where the overseas entity was registered as the proprietor in pursuance of an application made on or after 1 January 1999
  • qualifying estates in Scotland where the interest was registered on or after 8 December 2014
• In England and Wales, the Chief Land Registrar will be entering a restriction on the register of qualifying estates. The restriction won’t take effect until the end of the transitional period. The restriction will prohibit dispositions (a transfer, the grant of a lease for a term of more than 7 years or the grant of a legal charge) subject to certain exceptions (see Enforcing security below).
• The Act applies retrospectively. An overseas entity (that isn’t exempt) will have to deliver beneficial ownership information to Companies House where it disposes of UK property during the period beginning on 28 February 2022.
• If an entity doesn’t register as required, the Secretary of State can issue a notice compelling overseas entities that are registered owners of UK property to register on the overseas entities register, with criminal offences for non-compliance.

Debt providers that finance UK property can also be taking action now – compiling records of the overseas entities that they finance and contacting those entities to make sure they are preparing for registration. Debt providers can also review the finance documents for overseas entities to ensure that they adequately cover the registration requirement and ongoing information requirements (see New financing of UK property below) or whether additional representations and undertakings are required.

New financing of UK property

For new finance transactions where debt providers are taking security over UK real estate owned by an overseas entity:

• If the transaction is completed before the relevant sections of the Act come into force the debt provider can consider (a) whether the covenants are sufficient to compel registration at the relevant time or whether any conditions subsequent are required and (b) whether additional representations or covenants are required in respect of the duty on the overseas entity, once registered, to update Companies House annually.
• If the transaction is completed once the Act is fully in force, we expect to see conditions precedent requiring either registration of the overseas entity at Companies House or evidence that the entity is exempt before any security is taken (in the same way that a copy of the PSC register is a standard condition precedent for UK companies). If this is not done, then any application to register the overseas entity as the proprietor or register a legal charge will not be registered.

Enforcing security

What happens if the holder of a legal mortgage in England and Wales wants to enforce its security and the property owner is an overseas entity? If the overseas entity is registered then the process will be the same as it is currently. If the overseas entity is not registered (and is not exempt), the security holder will need to consider whether the chosen method of enforcement falls within one of the exceptions to the restriction entered on the register by the Chief Land Registrar. In England and Wales the exceptions include (amongst others) a disposition:

• made pursuant to a contract made before a restriction is entered in the register (noting that the restriction can be entered at any time once the relevant sections of the Act are in force);
• made in the exercise of a power of sale or leasing conferred on the proprietor of a registered charge or a receiver appointed by such a proprietor; or
• made by a specified insolvency practitioner in specified circumstances (details to be set out in regulations, not yet published).

Lack of registration (or exemption) therefore doesn’t necessarily mean that security cannot be enforced, provided that the enforcement action falls within one of the categories of permitted disposition. This is something that debt providers will want to consider when reviewing the covenants in existing finance documents to consider whether those covenants can be used to compel registration and compliance with the updating obligations in respect of that obligation.

We note that rights that are exercisable by an administrator or by creditors while a legal entity is in relevant insolvency proceedings are not to be taken into account when working out the beneficial ownership of an overseas entity. We note that administration is the only insolvency procedure under the Insolvency Act 1986 specified by the Act as constituting ‘relevant insolvency proceedings’.

Releasing security

To ensure a straightforward release process, if a property is being transferred to an overseas entity once the registration system is live, the releasing company/seller should ensure that the overseas entity is registered on the register of overseas entities or is an exempt overseas entity.

How can Eversheds Sutherland assist?

Our international team provides the full range of banking and finance services with dedicated real estate finance lawyers who regularly advise lenders and borrowers on the full range of real estate finance deals across all sectors, including highly structured multi-jurisdictional transactions. Please get in touch if you would like to discuss any of the issues raised in this article.