The Economic Crime Act
The Economic Crime (Transparency and Enforcement) Act 2022 requires non-UK companies or entities which own or purchase UK property to register details of their beneficial ownership. The Act will make the identity of individuals who ultimately own or control those overseas entities a matter of public record. One aim of these changes is to deter money laundering.
This note focuses on the application of the Act in England and Wales only, from a lender perspective in a real estate finance context.
The effect on dispositions by overseas entities
The overseas entities register launched at Companies House on 1 August 2022, but most of the Act's provisions relating to land transactions by overseas entities came into force on 5 September 2022.
- An overseas entity's beneficial ownership must be registered at Companies House for it to acquire UK property
Where an overseas entity is acquiring an interest in a "qualifying estate" (that is, a freehold estate or a leasehold for more than seven years), the Land Registry will not register the overseas entity as the registered proprietor without proof that its beneficial ownership has been registered at Companies House.
- Land Registry must enter restriction on the title of property owned by an overseas entity
The Land Registry will enter a restriction on the title of any qualifying estate where an overseas entity is the registered proprietor. This will prevent registration of any "disposition" (which includes a transfer, lease for more than seven years, or a legal charge) unless the overseas entity's beneficial ownership is registered at Companies House.
If an overseas entity already owned the property on 1 August 2022, this restriction will be entered on the title of the property at some stage between that date and 31 January 2023 (the end of the transitional period), but will not take effect until 1 February 2023.
Issues for lenders
The Act presents new issues to consider in real estate finance transactions where:
- a borrower is an overseas entity acquiring a qualifying estate; or
- a UK borrower is purchasing a qualifying estate from an overseas entity.
Lending to an overseas entity borrower that is acquiring a qualifying estate
Lenders must be satisfied that the overseas entity borrower has registered its beneficial ownership and obtained an overseas entity ID from Companies House. Otherwise the borrower will not become registered as the proprietor of the qualifying estate – the registration of the lender's charge over that property is dependent on this.
Lenders should therefore stipulate an additional condition precedent (CP), requiring evidence that the overseas entity is registered and has obtained the relevant ID. This will protect lenders by ensuring that their charge can be registered.
Lending to a borrower that is acquiring a qualifying estate from an overseas entity
The overseas entity seller will have a restriction on its title preventing it from selling the qualifying estate unless it has complied with the Act by registering its beneficial ownership.
The lender must require evidence that the overseas entity seller is registered and has obtained an overseas entity ID, so the seller can validly transfer to the borrower purchaser. As above, lenders should expect this to be included as a CP to the drawdown of funds.
Exception: if the overseas entity seller was already the registered proprietor before 1 August 2022, then the Land Registry restriction will not take effect until 1 February 2023. If the application to register the purchase and charge is lodged at the Land Registry before that date, then overseas identity ID evidence need not be a CP. However, some lenders may insist on this anyway out of caution.
The new registration process is cumbersome and technical, imposing onerous requirements on the agent verifying the information. It may take longer to complete than expected. Lenders should bear this in mind at the outset of any transaction involving an overseas entity borrower or seller.
Existing security over UK land
Lenders with existing security over real estate held by an overseas entity will need to consider the implications of the overseas entity not applying to register its beneficial ownership by the end of the transitional period on 31 January 2023. Such failure may be a criminal offence by the entity.
However, this will not affect the lender's ability to enforce its security. An exception to the standard Land Registry restriction will enable a sale by the lender as mortgagee, or by an administrator or receiver.
It is also worth noting that lenders who are overseas entities are not required to register their own beneficial ownership details under the Act, merely to take a legal charge over UK land. Such lenders will have to register themselves only if they themselves become owners of freehold or leasehold property, e.g. if they rent office premises for a term of more than seven years.
The Act presents new considerations for lenders where property is owned or being acquired by an overseas entity. Nonetheless, lenders should be assured that potential issues can be avoided by additional conditions precedent to funding. Lenders should also consider including express undertakings in the finance documentation to comply with the Act's provisions.