The Economic Crime (Transparency and Enforcement) Act – what this will mean for real estate lenders in Scotland

The Economic Crime (Transparency and Enforcement) Act (the Act) received Royal Assent on 15th March. We have published previous Law-Nows with general commentary on the real estate implications of the proposed bill, and detail of the subsequent changes made in the Act itself (see here and here), and more recently an initial outline for real estate lenders with a focus on requirements for HM Land Registry in England (see here). This Law-Now, for real estate lenders in Scotland, outlines the requirements for the Land Register of Scotland.

Implementation of the Act and the establishment of the new Companies House register for beneficial owners of foreign entities owning Scottish property will be big news for the commercial real estate sector in which a sizeable proportion of Scottish real estate investment and development transactions involve overseas structures and entities. The relevant sections of the Act are not yet in force, but are expected to commence over the next few months.

Whilst further work is needed on the part of Companies House and Registers of Scotland to develop the operational framework to establish the new Register of Overseas Entities, investors and lenders will need to plan for the consequences of the new regime and the additional due diligence which will be required.

UK-registered entities are already required to identify each person with significant control over the entity and to record their details in a dedicated register (the PSC register) and to notify Companies House whenever a PSC or their details change.

The new regime will impose similar requirements on overseas entities holding Scottish property, thereby improving the transparency of the ultimate beneficial owners. The new requirements will not affect overseas individuals owning Scottish property directly or through a UK entity.

By way of summary, pursuant to the Act:

1. an overseas entity that either (a) on or after 8 December 2014, owns a plot of land that is registered in the Land Register of Scotland, (b) in relation to a lease that was recorded in the General Register of Sasines or registered in the Land Register of Scotland before 8 December 2014 is, by virtue of an assignation of the lease registered in the Land Register of Scotland on or after 8 December 2014, the tenant under the lease or (c) is the tenant under a lease that was registered in the Land Register of Scotland on or after 8 December 2014, must be registered on the new Companies House register and must provide details of the beneficial owners of the entity. An overseas entity will have 6 months from commencement of the Act to comply with the new Companies House registration requirements. This requirement applies even if the overseas entity disposes of the land between 28 February 2022 and the end of the 6 month transition period. Please note that this is shorter than the “look back” period applying to property in England and Wales, being 1 January 1999; and
2. a “registered overseas entity” (following registration on the new register) will be required on an annual basis to confirm the information on the register remains up to date, or to deliver updated information.

New controls at the Land Register of Scotland will enforce the Companies House registration requirements in relation to Scottish land, as follows:

1. any disposition, standard security, lease or assignation of a lease (a “qualifying registrable deed”) granted by the overseas entity will remain valid, but the relevant qualifying registrable deed itself may not be delivered;
2. to prohibit registration of any relevant qualifying registrable deed by an overseas entity which has not complied with the new Companies House registration, the Keeper will be required to reject the application for registration at the Land Register of Scotland (please note that in England a restriction will be entered on the relevant titles, which will be a “red flag” to purchasers and lenders, but there is currently no equivalent system of restrictions in Scottish land registration); and
3. where an overseas entity is not yet registered as proprietor at the Land Register of Scotland, any relevant qualifying registrable deed by such overseas entity cannot be registered unless an exception applies.

Where a relevant qualifying registrable deed is made by an overseas entity that has not complied with the Companies House registration requirements, as mentioned, whilst the relevant qualifying registrable deed will be valid it will not be registered at the Land Register of Scotland and the disponee (buyer, tenant or chargee) transacting with the overseas entity cannot be registered at the Land Register of Scotland and so, importantly there will be no transfer of real rights in the Scottish land to the disponee (buyer, tenant or chargee).

Lender due diligence

On any new financing, during its initial due diligence lenders will require full details of entities which will hold the title to Scottish property, and where an overseas entity will be registered as proprietor, the lender will want evidence that the information required on the ownership is ready and sufficient for the application for the Register of Overseas Entities or where the entity is already registered, that the registration is up to date.

Additional verification may be required by the lender’s lawyers from the borrower’s lawyers, and conditions precedent relating to corporate due diligence and undertakings regarding registration of acquisitions and security will be expanded to include the additional applications and evidence of correct registration. Representations and undertakings in real estate finance loan agreements should be extended to accurate filings and compliance with the ongoing requirements to update and confirm the information on the new register.

Our team at CMS will be reviewing and analysing the technical detail and practical implications of the new requirements as and when implementation of the Act progresses. For further information on the proposed register please also refer to our general corporate briefing for funds and others. Further information is expected from Companies House and the Land Register of Scotland over the next few months.