Economic Crime (Transparency and Enforcement) Act 2022

Implications on UK Real Estate & Foreign Ownership

The key provisions of the Economic Crime (Transparency and Enforcement) Act (the Act) discussed below came into force on 15^th March 2022

Implementation of the Act and the establishment of the new Companies House register for beneficial owners of foreign entities owning UK property is key in the commercial real estate sector in which a sizeable proportion of UK real estate investment and development transactions involves overseas structures and entities.  

Companies House and HM Land Registry need to develop the operational framework to establish the new Register of Overseas Entities, investors and lenders will need to plan for the consequences of the new regime and the additional due diligence that they would need to carry out. 

UK-registered companies are already required to identify each person with significant control over the entity and to record their details in a dedicated register (the PSC register) and to notify Companies House whenever a PSC or their details change.  

The Act will impose similar requirements on overseas entities holding UK property, thereby improving transparency with regards to the identity of the ultimate beneficial owners.  It is important to note that the Act will not affect overseas private individuals owning UK property directly or through a UK entity. 

The Act requires that:

1. An overseas entity owning or entitled to own a property in the UK (in England and Wales this will be a freehold or a lease of longer than seven years) must be registered on the new Companies House register and must provide details of its beneficial owners.  An overseas entity which currently holds a property (acquired since 1 January 1999 in England and Wales) will have six months (i.e. by 15 September 2022) to comply with the new Companies House registration requirements.  This requirement applies even if the overseas entity disposes of the land between 28th February 2022 and the end of the six-month transition period; 
2. The “registered overseas entity” (following registration on the new register) to confirm the information on the register remains up to date on an annual basis, or to deliver updated information as and when there are changes to the registered details.

New controls at HM Land Registry will enforce the Companies House registration requirements in relation to a property in England and Wales, as follows:

1. No application may be made to register an overseas entity at HM Land Registry as owner of a property unless at the time of the application the entity is a registered overseas entity or is exempt;
2. Any transfer, charge or other disposition of a property by the overseas entity will remain valid, but the disposition itself may not be registered at HM Land Registry where the overseas entity has not complied with the new Companies House registration at the time of the disposition unless it is exempt at that time or another exception applies;
3. To prohibit registration of any disposition by an overseas entity which has not complied with the new Companies House registration, HM Land Registry will enter a restriction on the title of that relevant property; 
4. Where an overseas entity is not yet registered as proprietor at the HM Land Registry, any disposition by such overseas entity cannot be registered unless at the time of the disposition the entity is a registered overseas entity or it is exempt, or another exception applies.  

Where a disposition is made by an overseas entity that has not complied with the Companies House registration requirements referred to above, whilst the disposition will be valid it will not be registered at HM Land Registry and the buyer or the lender transacting with the overseas entity cannot be registered at HM Land Registry and so, importantly will not have powers to further dispose of the estate.

Due diligence by Lenders

Lenders will need to obtain full details of entities which will hold the title to UK property, and where an overseas entity will be registered proprietor, the lender will need to obtain evidence that the information required concerning the entity’s beneficial ownership is ready and sufficient for the application for the Register of Overseas Entities, or where the entity is already registered, that the registration is up to date.

Additional verification may be required by the lawyers acting for the lender or the lawyers acting for the borrower, and conditions precedent relating to corporate due diligence and undertakings regarding registration of the purchase and charge will include the additional applications and evidence of correct registration.  Representations and undertakings in relation to loan agreements should be extended to accurate filings and compliance with the ongoing requirements to update and confirm the information on the new register.

Conclusion

Pursuant to the Act, the standards of due diligence concerning overseas wealth entering the UK have been substantially increased. Authorities in the UK now have significant enhanced powers and offenders face both fines and custodial sentences.

The UK and especially London, has enjoyed an unprecedented position in the eyes of the ultra-wealthy. Banks and services providers will have to assess their own governance and controls to ensure they are aligned to the Act, amid increased public opinion (in light of recent sanctions against rich oligarchs) against any perception of a ‘soft’ approach towards suspect funds entering the UK.