Economic Crime (Transparency and Enforcement) Act 2022

The ECTEA (“the Act”) came into force on 15 March 2022.  The Act establishes a new register at Companies House for overseas entities that own a “qualifying estate” in UK property (“the Register”).  The Register went live on 1 August 2022.

The obligation to register catches overseas entities who have owned UK property since 1 January 1999 or are intending to acquire a qualifying estate. A qualifying estate is freehold or a leasehold granted for a term of more than 7 years since the date of the grant. Entities who are obliged to register are required to provide details of their beneficial owners. On registration, Companies House allocates a unique overseas identity ID (“OE ID”).

There is a transitional period between 1 August 2022 and 31 January 2023. Overseas entities who already own UK property (prior to 1 August 2022 but who became registered proprietor on or after 1 January 1999) must apply for registration during the transitional period. Alternatively, any such company may dispose of their property before the end of the transitional period without having to register with Companies House (although details of the disposal must be provided to Companies House).

Restrictions on dispositions

The Act also imposes new obligations on the Land Registry which prevent the Land Registry from registering an overseas entity as proprietor of a qualifying estate unless the overseas entity has first obtained an OE ID or an exemption applies. These provisions came into force on 5 September 2022.

Where an overseas entity applies to be registered as proprietor on or after 1 August 2022, a restriction will be entered on the register as follows:

“No disposition within section 27(2)(a), (b)(i) or (f) of the Land Registration Act 2002 is to be completed by registration unless one of the provisions in paragraph 3(2)(a)-(f) of Schedule 4A to that Act applies.”

Where an overseas entity already owns a qualifying estate (and became registered as proprietor of that qualifying estate pursuant to an application made on or after 1 January 1999), the Land Registry are obliged to enter a restriction on the register as soon as reasonably practicable and in any event, by the end of the transition period (31 January 2023) although the restriction will only take effect after the transitional period ends on that date.

The effect of the restriction is that the overseas entity will not be able to transfer the property, grant a lease of the property for a term over 7 years or grant a legal charge of the property unless it can comply with the restriction.

Evidence required by the Land Registry

In order to comply with the restriction, the applicant will need to comply with one of the provisions in paragraph 3(2) of schedule 4A of the Land Registration Act 2002, which was inserted by the Act.

Sub-paragraph (a) provides that the applicant should submit to the Land Registry the valid OE ID. Note that, whilst that paragraph states that, in the alternative, evidence may be submitted that the entity is an exempt overseas entity, at the date of this article, no regulations have yet been made specifying which overseas entities would be exempt.

Sub-paragraphs (b) to (f) cover specific exempt dispositions. These include:

• where the disposition is made pursuant to a statutory obligation or court order;
• where the disposition is made pursuant to a contract made before the restriction was entered in the register; and
• where 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.

There are two certificates (OE1 and OE2) that may be given by a conveyancer and submitted to the Land Registry where the applicant is relying on one of these exemptions.

Concerns for lenders

For existing loans:

• Any restriction registered on the title may prevent a sale, so a lender will be concerned to ensure that it is able to enforce any existing legal charge granted by an overseas entity over the property in its favour. It would be prudent for lenders to review their existing loan book and identify borrowers who would be subject to the obligation to register. Lenders may be able to rely on the further assurance clause in existing loan documentation to encourage those entities to register before the transitional period ends.
• It is, of course, preferable for any overseas borrower to register, but if it does not, then it is likely that any lender would be able to rely on the exemption for dispositions “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”.

For new loans:

• In respect of any purchase, lenders will be concerned to ensure that any transfer or lease can be registered, and also the legal charge in the lender’s favour.
• If the seller is an overseas entity, there may be an existing restriction on the register preventing a sale, so the borrower will need to ensure that the seller discloses its OE ID.
• A new restriction would be entered on any title where an overseas borrower acquires a UK property and would prevent the borrower from granting a legal charge. Lenders should include, as a condition precedent to any new facility, a requirement for the borrower to provide its OE ID, so that it can be certain that the charge can be registered at the Land Registry (and subsequently enforced if it became necessary to do so, without having to rely upon an exception).
• Lenders may wish to include an undertaking to oblige the borrower to comply, on an ongoing basis, with any requirements to update the registration as set out in the Act, during the loan term.

Please note that this information is provided for general knowledge only and therefore specific advice should be sought for individual cases.

For further information, please contact Liza Lam-Kee.