The Economic Crime (Transparency and Enforcement) Act – consequences for enforcement

United Kingdom

The land registration elements of the Economic Crime (Transparency and Enforcement) Act (“ECTEA”) came into force on 5 September 2022, 5 weeks after the new Companies House Register of Overseas Entities (the “OE Register”) became operational on 1 August 2022. 

This second stage of implementation has had an immediate impact on the registration of property acquisitions and new leases and security being taken over those acquisitions/leases. We have previously highlighted the consequences of ECTEA for real estate finance in The Economic Crime (Transparency and Enforcement) Act – what this will mean for real estate lenders (cmslawnow.com) and Staggered implementation of the Economic Crime (Transparency and Enforcement) Act – an update for real estate lenders (cms-lawnow.com)

The new regime also poses additional considerations for lenders when it comes to considering restructuring proposals and enforcement scenarios involving real estate owned by overseas entities (“OEs”). In this note we will look at the ECTEA’s impact on security over land in England and Wales.

Recap on registration triggers and Land Registry (“LR”) controls

  • A new property acquisition by an OE will trigger immediate registration - an OE may only apply for registration as the proprietor of a “qualifying estate” (in England and Wales this will be a freehold or a lease of longer than 7 years) if it is already registered in the OE Register at the time of the LR application.

  • An OE which acquires a qualifying estate (but is not yet registered at the LR), and which enters into a charge will not be able to register the charge at the LR unless the OE is registered in the OE Register at the time of the entering into of the charge.

A lender will be concerned to avoid any cancellation of LR applications and any subsequent delay and will want to ensure that any LR application is completed within the LR’s exclusivity priority period of 30 business days, as if not, a subsequent transfer, charge or other disposition or notice could be registered in priority to the lender’s security.  As such a lender will now require OE registration as a condition precedent to funding.

  • An OE which is already a registered proprietor of a qualifying estate or which becomes a registered proprietor of a qualifying estate pursuant to an application to the LR made before 31 July 2021 will have a transition period until 31 January 2023 to register on the OE Register unless it has already registered or is exempt. Where an OE acquired the qualifying estate recently and applied to the LR on/after 1 August 2022, it will not have the benefit of the transition period and it will be required to first register on the OE Register before it enters into any charge, lease or disposal, in order for the LR to register that transaction. A lender will want to check the registration details for recently acquired properties to confirm whether a new obligor needs to register on the OE Register before providing security, and whether an OE seller needs to register before funding any acquisition.

  • Following registration on the OE Register, an OE is required on an annual basis to confirm the information on the register remains up to date or to deliver updated information. If it fails to update its registration, an OE will be treated as unregistered. A lender will want to ensure that the OE’s registration remains valid ahead of entering into any new security.

  • To prohibit registration of any disposition by an OE which has not registered or complied with the ongoing registration requirements in the OE Register, the LR will enter a restriction on the title to any qualifying estate which will prevent dispositions being registered without evidence of compliance with or exemption from the registration requirements of ECTEA.

  • For lenders’ purposes, the relevant exemptions from the LR’s ECTEA restriction on title allow for enforcement of existing registered security by permitting the following dispositions to be registered without evidence of ECTEA compliance:

    • those made in the exercise of a power of sale or leasing conferred on the owner of a registered charge, or a receiver appointed by the owner of the charge; and

    • those made by a specified insolvency practitioner in specified circumstances (we await clarity on the detail of this exemption which is expected in secondary legislation).

  • These exemptions will apply to enable the enforcement of an existing legal mortgage even if the OE is not registered on the OE Register or its registration is not up to date.

Importance of the legal mortgage

The strongest form of security over land is a legal mortgage.  A legal mortgage over registered land is only created on its registration at the LR.  Unless and until the mortgage is registered at the LR, the security will be considered as an equitable mortgage, which offers less protection to the lender for the following reasons:

  • an equitable mortgage will not have priority ahead of a subsequent legal mortgage, so another party could subsequently take first ranking security ahead of the lender’s “older” security;

  • in practice, in considering enforcement over real estate, a lender will usually look to enforce by appointing a receiver pursuant to the powers afforded in a legal mortgage, it will not wish to rely on an equitable mortgage for enforcement. Whilst it may be possible to convey title by way of an equitable mortgage in practice persuading a purchaser to do so may be challenging;

  • an equitable mortgage will not have the benefit of the exemptions to the LR ECTEA restriction mentioned above to allow a mortgagee or receiver exercising the power of sale or leasing and so to implement any restructuring or enforcement using a mortgagee’s or receiver’s powers, the lender will require that the OE chargor registers in the OE register, and may need to take replacement security and register this at the LR.

Where it has been agreed on legacy transactions that a lender would accept equitable security rather than a registered legal mortgage, a lender will need to consider now whether it should seek to “upgrade” that security and require that this be registered at the LR ahead of the end of the transition period.  Going forward, it will only be possible to upgrade such security where the OE chargor has already registered in the OE Register ahead of entering into the security, and where that registration remains valid when the application is submitted to the LR.

Practical points for restructuring transactions

In advance of a potential restructuring, a lender may wish to review existing finance and security documentation and engage with the borrower to procure that any OEs holding real estate are promptly registered on the OE Register.

In agreeing any restructuring package, a lender will want to consider including evidence of ECTEA compliance in the conditions precedent and introducing specific ECTEA compliance undertakings and specific ECTEA conditions for consenting to disposals which will be caught by the regime.

As outlined in our previous Law-Nows, the process for registration on the OE Register is complex and will require additional time and resources alongside the regular demands of a financing transaction.