Staggered implementation of the Economic Crime (Transparency and Enforcement) Act – an update for real estate lenders

The new Companies House Register of Overseas Entities (the “OE Register”) became operational and key parts of the Economic Crime (Transparency and Enforcement) Act (“ECTEA”) came into force on 1 August 2022.

The land registration elements of ECTEA have been deferred and will come into force on 5 September 2022 – this second stage of implementation will with effect from such date have an immediate impact on the registration of property acquisitions and new leases and security being taken over those acquisitions/leases.

From 5 September 2022 an overseas entity (“OE”) will not be able to be registered as proprietor at the Land Registry (the “LR”), and security granted by an OE over a newly acquired property will not be able to be registered at the LR unless the OE is already registered on the OE Register. For existing properties already held by OEs there will be a “transitional period” of 6 months to register, which commenced on 1 August 2022 and will end on 31 January 2023.

We have previously highlighted the consequences of ECTEA – see Real estate changes in Economic Crime (Transparency and Enforcement) Act 2022 (cms-lawnow.com) and The Economic Crime (Transparency and Enforcement) Act – what this will mean for real estate lenders (cmslawnow. com). Our briefing Focusing on Funds - New Register for overseas legal entities and their owners holding UK real estate (cms-lawnow.com) gives further detail on the process for registration on the OE Register and required information, which must be updated/confirmed annually. Our recent Law-Now of 18 July discusses in detail the triggers and process for registration on the OE Register and the LR controls.

The purpose of this Law-Now is to discuss the consequences of ECTEA and its staggered implementation specifically in relation to real estate financing and security. This note focuses on the position regarding registered land in England and Wales. Similar controls will be imposed by the land registries in Scotland and Northern Ireland.

Registration triggers and LR controls

We outline below the LR requirements. In reviewing each application received on and from 5 September 2022, the LR will be checking the OE Register to confirm the OE’s unique ID number and the date of its registration in the OE Register to ensure the OE has complied with ECTEA.

1. 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 registered/registrable leasehold property (where the lease is granted for a term of longer than 7 years)) if it is already registered in the OE Register at the time of the LR application. On and from 5 September 2022, the LR will cancel any application received to register an OE as proprietor of a qualifying estate which is submitted to the LR without evidence that the OE is already registered on the OE Register or is exempt. Any connected application to register a lender’s security over the qualifying estate will also be cancelled. Following cancellation, in order to successfully register at the LR, the OE will need to register in the OE Register and submit a new application to the LR with its unique OE ID number.
2. 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. On and from 5 September 2022, the LR will cancel an application to register a charge entered into by an OE without evidence that at the time of the charge the OE was already a “registered overseas entity” or is exempt, unless another exception applies. If the OE has not yet registered on the OE Register or registered on the OE Register after entering into the charge, the application will be rejected.Following cancellation, in order to register at the LR, the OE would then need to register on the OE Register (if it has not already done so), enter into a new charge and submit a new application to the LR in respect of the new charge.If an OE enters into a charge without having registered in the OE Register, it will be in breach of ECTEA. This is the most serious criminal offence in ECTEA punishable by a fine and/or imprisonment of up to 5 years.

A lender will be concerned to avoid any cancellation of LR applications and any subsequent delay. Prior to advancing the funds to facilitate an acquisition, a lender will require a priority search is completed at the LR which then allows an exclusivity period of 30 business days in which only the acquisition and the lender’s security can be registered. The lender will want to ensure that the application to register the acquisition and its security is completed within that period, as if not, a subsequent transfer or charge could be registered in priority to the lender’s security – this priority time period is crucial to lenders’ security.

We expect lenders may consider the status of current transactions involving property acquisitions by OEs and assess these as follows:

• Transactions which are likely to complete in the first half of August will benefit from the additional LR buffer period and should allow sufficient time for submission of the LR applications ahead of 5 September 2022;
• Where a transaction is anticipated to complete towards the second half of August, and there is a chance that the LR application will not be submitted in time, a lender may want to consider requiring registration on the OE Register as a condition precedent to funding;
• We would expect lenders to require OE registration as a condition precedent to funding for transactions completing from around the August bank holiday on the 26th August as on and from 5 September 2022 the LR will require evidence that the OE was registered in the OE Register at the time the OE enters into the security.

Transitional period pre-1 February 2023 and thereafter

An OE which is already a registered proprietor of a qualifying estate (which it acquired since 1 January 1999) will have until 31 January 2023 to register on the OE Register unless it has already registered or is exempt (this requirement applies even if the OE disposes of the land between 28th February 2022 and 31 January 2023 and seeks to capture disposals which would otherwise allow avoidance of disclosure). The OE will commit an offence if it has not yet registered on the OE Register by 1 February 2023.

To prohibit registration of any disposition by an OE which has not registered in the OE Register, the LR will enter a restriction on the title to any qualifying estate which will prevent dispositions being registered on/from 1 February 2023 without evidence of compliance with or exemption from the registration requirements of ECTEA.

Lenders will want to ensure that current and new obligors in their financing structures comply with ECTEA and register in the OE Register well in advance of 31st January 2023. Borrowers and lenders may want to ascertain which obligors in current finance structures are affected – a search of the index of proprietors’ names may assist with this.

In the run up to the 1st February 2023, as all LR applications made on and from this date will require evidence that any OE is registered in the OE Register at the time it enters into any disposition, where a lender is taking security over properties already owned by an OE, or funding any new acquisition or new lease where the seller or landlord is an OE and where there is any risk an application will not be made to the LR before 31st January 2023, a lender is likely to require evidence that each OE is registered in the OE Register as a condition precedent.

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. Lenders and borrowers will be keen to ensure that current transactions can be completed where reasonably possible and applications submitted to the LR ahead of 5 September 2022, but in parallel borrowers and sponsors may want to initiate the process for registration on the OE Register now in case transactions are delayed.