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

The Economic Crime (Transparency and Enforcement) Act (the Act) received Royal Assent on 15th March and our previous Law-Nows (here and here) provide commentary on the real estate implications of the proposed bill, and detail of the subsequent changes made in the Act itself.

Implementation of the Act and the establishment of the new Companies House register for beneficial owners of foreign entities owning UK property will be big news for the commercial real estate sector in which a sizeable proportion of UK 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 HM Land Registry 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.

The purpose of this shorter Law-Now is to provide an initial outline for real estate lenders, and whilst it focuses on the requirements for HM Land Registry in England and Wales, similar requirements will be imposed in relation to land in Scotland.

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 UK property, thereby improving the transparency of the ultimate beneficial owners. The new requirements will not affect overseas individuals owning UK property directly or through a UK entity.

By way of recap, pursuant to the Act:

1. an overseas entity that owns or is entitled to own a “qualifying estate” in the UK (in England and Wales this will be a freehold or a lease of longer than 7 years) must be registered on the new Companies House register and must provide details of the beneficial owners of the entity. An overseas entity which currently holds a qualifying estate (acquired since 1 January 1999 in England and Wales) will have 6 months from commencement of the Act to comply with the new Companies House registration requirements unless exempt. This requirement applies even if the overseas entity disposes of the land between 28th February 2022 and the end of the 6 month transition period; 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 HM Land Registry will enforce the Companies House registration requirements in relation to English and Welsh land, as follows:

1. no application may be made to register at HM Land Registry an overseas entity as owner of a qualifying estate unless at the time of the application the entity is a registered overseas entity or is exempt;
2. any transfer, charge or other disposition of a qualifying estate by the overseas entity will remain valid, but the disposition itself may not be registered at HM Land Registry where the overseas entity has not complied with the new Companies House registration at the time of the disposition unless it is exempt at that time or another exception applies;
3. to prohibit registration of any disposition by an overseas entity which has not complied with the new Companies House registration, HM Land Registry will enter a restriction on the title to any qualifying estate; and
4. where an overseas entity is not yet registered as proprietor at the HM Land Registry, any disposition by such overseas entity cannot be registered unless at the time of the disposition the entity is a registered overseas entity or it is exempt, or another exception applies.

Where a disposition is made by an overseas entity that has not complied with the Companies House registration requirements, as mentioned, whilst the disposition will be valid it will not be registered at HM Land Registry and the disponee (buyer, tenant or chargee) transacting with the overseas entity cannot be registered at the Land Registry and so, importantly will not have powers to further dispose of the estate.

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 UK property, and where an overseas entity will be registered proprietor, the lender will want evidence that the information required on the beneficial 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.

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