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What does the UK national security regime mean for real estate?

Posted on 20 July 2021

On 29 April 2021, the UK National Security and Investment Act received Royal Assent and is expected to come into force in early 2022.

This new Act gives the Government power to investigate and prohibit transactions on national security grounds. This includes the power to call in and potentially cancel deals that may undermine UK national security.

There is a duty on parties to notify the Government in advance of certain transactions. There is also a system for voluntary notifications where parties are concerned there may be a call-in. The new regime is aimed mainly at corporate transactions but may also sometimes catch real estate deals.

Mandatory notification

For certain corporate transactions, there will be a duty to seek Government clearance before a deal goes ahead. This will apply to the acquisition of a 25% or greater share of corporate entities involved in 17 specified sectors such as civil nuclear, communications, data infrastructure, defence, energy or transport.

Mandatory notification will not apply to real estate asset purchases.

Call-in powers

The Government will have power to "call in" transactions that are not subject to mandatory notification, in order to carry out a national security assessment. This power can be exercised up to five years after the transaction takes place, or (if earlier) up to six months after the Secretary of State becomes aware of the transaction.

This power may be exercised for real estate asset purchases, as well as for corporate acquisitions that fall outside the mandatory notification rules. The call-in power applies to any deal completed since 11 November 2020, even though the Act will only come into force in early 2022.

If the Government decides there is a risk to national security, it has the power to prohibit or unwind the transaction altogether. It may also allow the transaction subject to conditions, e.g. limiting site access to named individuals, or stipulating that only persons with UK security clearance may be part of operational management.

Voluntary notification

There will be a system for voluntary notifications of transactions not caught by the mandatory regime, if parties are concerned their deal might be "called in". This option does apply to real estate asset purchases.

Review process and timetable

After a mandatory or voluntary notification is made, an initial review will take up to 30 working days. The Government may then carry out a detailed national security assessment for an additional 30 working days, extendable by a further 45 working days.

How likely is the Government to block a routine real estate asset purchase?

Not very likely, but it is not impossible. The Government will take into account the nature of the asset and any risk to national security if it were to fall into hostile hands, perhaps due to its sensitive location. Examples might include:

  • land used for any of the 17 listed sectors, or situated nearby, e.g. adjacent to a military base, telecommunications facilities, major ports or airports;
  • property in Whitehall or very near other key Government offices.

The Government will also take into account the identity of the purchaser. It has said most acquirers do not pose a national security risk, which it considers most likely to arise from hostile states and parties acting on their behalf using traditional and non-traditional means. Although no specific states are named by Government, it appears certain countries are regarded with greater suspicion.

The Government has indicated that it expects to “intervene very rarely" in asset transactions.

Penalties for non-compliance

Failure to comply with the mandatory notification requirement may result in imprisonment of up to five years and fines (up to 5% of worldwide turnover or £10 million – whichever is greater), together with the transaction being void.

Similar sanctions also apply for completing an acquisition without clearance. Civil and criminal sanctions can also be imposed for non-compliance with interim orders and information requests.

Parties are already contacting the Investment Screening Unit of the Department for Business, Energy and Industrial Strategy (BEIS) to inform them of deals, in part to reduce the five year period to six months. Mishcon has already made voluntary notifications to BEIS and received helpful responses indicating that a proposed transaction would be unlikely to be "called in" post-completion.

For more information, please see our detailed guide The new National Security Regime – effect on Real Estate here.

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