The Economic Crime (Transparency and Enforcement) Act 2022 ("ECA") received Royal Assent on 15th March 2022. This legislation has been rushed through Parliament in light of the war in Ukraine and the various sanctions that have followed. Whilst the ECA is not yet in force, given the speed with which it has progressed through Parliament and received Royal Assent, this is expected in the very near future.
What has happened?
The Economic Crime (Transparency and Enforcement) Act 2022 ("ECA") received Royal Assent on 15th March 2022. This legislation has been rushed through Parliament in light of the war in Ukraine and the various sanctions that have followed. Whilst the ECA is not yet in force, given the speed with which it has progressed through Parliament and received Royal Assent, this is expected in the very near future.
The immediate effects of the ECA on finance transactions
In the first instance, lenders should be aware of the immediate effects of the ECA on the legal documentation that governs their finance transactions, so that they can anticipate and manage any associated risks accordingly. For those transactions involving (or which may come to involve) an overseas element, we are likely to see the inclusion of additional Conditions Precedent (CPs), as well as representations and undertakings, taking into effect the various obligations imposed by the ECA.
What does it do?
Among other things, the ECA establishes a register of overseas entities (to be maintained by Companies House) and imposes an obligation on any overseas entity that either owns, or wishes to own, UK land (acquired after a certain date, see below) to take certain steps to identify their beneficial owner(s) and to register them on that register. It also imposes a duty on overseas entities to update the information contained in the register annually. Failure to update the register is an offence under the ECA, as is delivering (or causing to be delivered) misleading, false or deceptive information.
What is an overseas entity?
An overseas entity is a legal entity that is governed by the law of a country or territory outside the United Kingdom.
Why is this relevant?
Significantly, the ECA restricts the ability of any overseas entity that has failed to register (in the register of overseas entities):
- to be registered in the UK as a proprietor of a qualifying estate in land; or
- in respect of those entities that are already registered as proprietor of a qualifying estate in land (after 1st January 1999 in the case of land situated in England and Wales and on or after 8th December 2014 in the case of land situated in Scotland - these "retrospective" provisions do not apply to Northern Ireland) to effect certain dispositions of registered land, including granting charges over that land.
Effectively, the ECA compels certain overseas entities to register in the register of overseas entities. Failure to so register will render such entities unable to:
- register as proprietor of that land in the UK; and/or
- deal with that land.
What is a qualifying estate?
A qualifying estate is either:
- in England and Wales:
- a freehold estate in land; or
- a leasehold estate in land granted for a term of more than 7 years from the date the lease was granted; or
- in Northern Ireland:
- a freehold estate in land; or
- a leasehold estate in land granted for a term of more than 21 years from the date the lease was granted.
Broadly similar provisions apply in Scotland (note that for leases it will only include those with a term in excess of 20 years).
How will this be policed once the ECA comes into force?
In England and Wales, and Northern Ireland, once an overseas entity has registered as a proprietor of a qualifying estate in land, a restriction must be entered in the title registry preventing the registration of any:
- transfer;
- lease for a term of more than 7 years from the date of commencement of the lease (or 21 years in the case of Northern Ireland); or
- charge.
In addition, a restriction must also be entered in the title registry in relation to any overseas entity that is already registered as proprietor of land if that land is situated in England and Wales and the application for registration was made after 1st January 1999.
These retrospective provisions of the ECA do not apply to land situated in Northern Ireland.
In Scotland, any overseas entity whose title was, or is, registered with the Registers of Scotland on or after 8 December 2014 will require to be registered in the new register of overseas entities, or excepted as below, for any of the following documents granted by them to be accepted for registration in the Land Register:
- disposition (transfer);
- standard security;
- lease for a term of more than 20 years; or
- assignation (transfer) of a lease with a term of more than 20 years.
Note that Scotland also has a separate transparency scheme, the Register of Persons Holding a Controlled Interest in Land, coming in to force on 1 April which also captures overseas entities and certain other parties. Overseas entities may fall out of scope of this register once the new register of overseas entities comes into force. A decision is awaited from the Scottish Government.
Are there any exceptions to the restrictions on disposal?
Yes, there are various circumstances in which certain dispositions can be made irrespective of the restriction, including:
- the entity is already registered as an overseas entity (this provides the impetus for the overseas entity to register) at the time of the disposition;
- the disposition is made in the exercise of a power of sale or leasing conferred on the proprietor of a registered charge or a receiver appointed by such a proprietor; and
- the disposition is made by a specified insolvency practitioner in specified circumstances.
What does this mean?
After the ECA comes into force, the effect of the above will include the following:
If a lender is taking security over land that is being acquired by an overseas entity:
It will be essential to check, in the first instance, whether the overseas entity is registered on the register of overseas entities. If the entity does not feature on the register, it will not be entitled to be registered as proprietor of that land and therefore the security over that land cannot be registered.
If a lender is refinancing liabilities secured on land that is already owned by an overseas entity and which was acquired after 1st January 1999 (England and Wales) or after 8th December 2014 (Scotland) and a restriction has been registered (in England and Wales):
Lenders must first ensure that the overseas entity is registered on the register of overseas entities, otherwise, in England and Wales, the existing restriction will prevent registration of a new charge over that land and in Scotland the standard security will not be accepted for registration in the Land Register. Indeed, even if such a restriction has not been registered, it may be prudent to require the overseas entity to register on the register of overseas entities, as a restriction could be registered during the course of the transaction.
If security has already been taken over land owned by an overseas entity:
The exception referred to above (allowing a sale by a proprietor of a registered charge or a receiver) should mean that the security can still be enforced, even if the overseas entity is not registered. The position is somewhat less clear if the sale is by an insolvency practitioner as the exception wording in the legislation refers to a disposition "made by a specified insolvency practitioner in specified circumstances". As of yet, no further guidance has been published to address what is meant by "specified circumstances". It may be that sales by a liquidator, or by an administrator appointed by a qualifying floating Chargeholder, will be permitted. It is unlikely that a sale by an administrator appointed by directors would be permitted, as this could provide a route for an overseas entity to circumvent the restriction.
Other potential consequences
In addition to the obligation to register, there is an ongoing obligation for overseas entities to update the register on an annual basis. As such, when lending to an overseas entity and security over land is being taken, as mentioned above, we are likely to see additional representations or undertakings within finance documents monitoring compliance with the new registration requirements and ensuring such entities continue to do so.
