Economic Crime (Transparency and Enforcement) Act 2022: impact on lenders

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The Economic Crimes (Transparency and Enforcement) Act 2022 (the Act) was swiftly passed by the UK parliament following Russia’s invasion of Ukraine. The law received royal assent on March 15, 2022, although parts of the law have yet to come into force. The law aims to address concerns about ‘dirty money’ being used to buy property in the UK and to improve transparency over ownership, which may previously have been shrouded in layers of secrecy.

The Act introduces a new register – the Register of Foreign Entities (ROE) – requiring “foreign entities” owning property in the UK to register the identity of the beneficial owners of that foreign entity at Companies House and maintain this register at day. Failure to do so is a criminal offence. The law will apply retrospectively in England, Wales and Scotland. Lenders must therefore consider the implications not only on new secured loans, but also on their portfolio.

Lenders should take steps to ensure that borrowers comply and should be aware that failure to comply, among other things, will prevent their new collateral from being registered with the relevant land registry.

Who does the law apply to?

The law will apply to all foreign entities that are registered as the owner of a “relevant interest” in the land.

It will include companies not incorporated in the UK, even if the company is UK tax resident, and limited liability companies (LLPs); foreign foundations and non-UK partnerships which, under the laws of the country which governs them, have separate legal personality. This means that companies and LLPs incorporated in offshore jurisdictions such as Jersey, Guernsey and the Isle of Man will potentially be caught by the law, subject to any exemptions which will be outlined in the regulations when they are published.

What does “relevant interest” mean in land?

In England and Wales, a foreign entity will be deemed to have a “relevant interest” in land where it has full ownership or a lease for more than seven years where the application to register the foreign entity with the Land Registry as owner of that interest was made on or after January 1, 1999. The registered owner of a charge is not subject to the regime, which means that foreign lenders are not required to register as a secured creditor.

A foreign entity has a relevant interest in land in Scotland if it is the owner of the land, the tenant under a lease of more than 20 years or has taken an assignment of lease and the disposition, lease or the assignment in question was registered in the Land Register of Scotland on or after 8 December 2014.

In Northern Ireland, leases must be over 21 years old and the trigger date is the date these parts of the law come into force.

There is no obligation to disclose any trust relating to the ownership of the land, including where a UK entity holds relevant property in trust for a foreign entity. The rules relate only to the ownership of the foreign entity.

Why should lenders care?

The effect of the Foreign Entity Act has implications for lenders against UK ownership:

  • In England and Wales this prevents the registration of “disposals” – the land register will include a restriction on the title of any property acquired by a foreign entity from 1 January 1999. This will prevent a disposal, which includes the conclusion of a conveyance, the granting of certain leases and, especially for lenders, the granting of a mortgage/encumbrance, of that property to be effectively registered at the relevant Land Registry – but not at Companies House, the where applicable – unless the foreign entity is registered in the “registry of foreign entities” or is exempt.
  • In Scotland any application by an overseas entity to register a disposition, lease or assignment and any application by a person acquiring property, lease or standard security from an overseas entity will be rejected by the Land Registry at unless the foreign entity is registered in the BR or it is exempt.
  • There are additional hurdles to acquisitions – if a foreign entity or trust, purchasing through their trustees who are foreign entities, purchases property in the UK they will not be registered as the owner unless they are on the ROE or exempt. This will be particularly important where lenders are advancing funds to an overseas borrower to acquire property in the UK and intend to take security on that property. Without being registered, not only will the lender’s collateral not be registered, but the foreign borrower will not be registered as the owner.
  • It is necessary to examine the existing loan portfolio – with regard to a lender’s portfolio, where the security has already been registered at the relevant UK land registry, if an overseas borrower is going to sell the property, for example, to repay the loan, the land registry will only authorize the transfer if this borrower is registered with the ROE or is exempt from it.
  • The drafting of facility agreements will need to be stricter – since the granting of a registrable lease is also subject to the law, lenders should consider including restrictions in facility agreements regarding “permitted assignments”. » and the granting of professional leases in general. The law is far-reaching because not only does it affect the foreign borrower granting a registerable business lease as landlord, it also prevents the tenant from being registered on title if it is also a a foreign entity, without being entered in the register.
  • There are timing implications for new transactions – lenders should bear in mind that before a foreign entity can register on the ROE, one month’s notice must be given to the beneficial owners. This should be factored into any schedule to avoid delays in closing new transactions.

What exemptions will apply?

Any foreign entity that does not have property in the UK will be exempt from registration.

If, under a facility agreement, an overseas debtor is permitted in the future to acquire property in the UK, we strongly encourage lenders to ensure that such debtors are also on the register from the first day, or at least that all conditions precedent to an acquisition include this as a contractual requirement.

Details of any other exempt foreign entities will appear in regulations that have not yet been published.

Useful for lenders, although in England and Wales there will be a restriction on title to the land register, there will be exemptions relating to sales through a mortgagee or receiver. The exact circumstances remain to be clarified.

What must the foreign entities concerned do?

When applications are open, foreign entities subject to the law must apply to be included in the ROE at Companies House.

If the foreign entity already has qualifying property in the UK, it must submit this application no later than the date that is six months after the date these parts of the law come into force.

When effective, the request will require either a statement that the foreign entity has not made any relevant disposition since February 28, 2022, or details of any disposition it has made since that date. This therefore prevents foreign entities from circumventing the registration regime before it comes into effect.

It is mandatory to update this information on an annual basis.

What should lenders do now?

We don’t yet know when this part of the law will come into effect or when Companies House will have established ROE, but it’s important that lenders are aware of the implications and start acting on new transactions now.

Lenders with pending transactions involving foreign entities that have committed to make a purchase but have not completed the transaction by the time this part of the Act comes into force may find themselves in the situation where the borrower may be able to register the transfer at the relevant cadastre, due to an exemption for pre-existing contracts, but not the security without the foreign entity appearing on the ROE, unless exempt.

Lenders should review their existing portfolios and identify any transactions involving a foreign entity with UK property. Lenders may wish to have a conversation with affected customers to ensure they are aware of their obligations.

How will facility agreements change?

We expect the following updates to be made once the regime is implemented:

  • If security is taken on a foreign entity owning property in the UK, the foreign entity’s identification number will need to be provided as a precondition for withdrawal – this means that registration at Companies House must be completed as a condition precedent and lenders should take this into account when closing the relevant transactions.
  • A commitment to maintain relevant information in the register at least once a year – entities can, as for the regime of “persons exercising significant control” (PSC regime), bring forward an update date, for example to align a group’s reporting schedule. We also expect to see disclosure undertakings that require the relevant entity to confirm to the lender that it has met its obligations, similar to the updates we have seen in the PSC scheme facilities.
  • There may also be restrictions on permitted transfers, acquisitions, or grants of registerable business leases imposed on both the landlord and the tenant. These can only be automatically authorized when this regime does not apply or, if it does apply, provided that the corresponding applications have been completed and the identification numbers have been provided before the transaction.

In addition, foreign entities acquiring property in Scotland will need to comply with the Land Reform (Scotland) Act 2016 (Register of Persons with a Controlling Interest in Land) Regulations 2021. Please see our separate guide – Register Scottish People with a Controlled Interest in Land (RCI) – for more details.

Co-written by Lyndsey Mitchell of Pinsent Masons.

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