The Economic Crime (Transparency and Enforcement) Act 2022 ("ECTEA"), the UK's new regime for the registration of overseas entities ("OEs") holding UK land, is now in force after being fast-tracked through Parliament and having gone 'live' on 5 September 2022.

The ECTEA provides for a register of OEs to be maintained (the "Register") by UK Companies House and sets out how OEs should register, what information they need to provide and penalties for non-compliance.

For more information about the ECTEA, please visit our earlier briefing here. 

Whilst the ECTEA has implications for both borrowers and lenders, this note focuses on why real estate lenders should pay close attention to this new regime and how the introduction of the Register could impact on a financing transaction.

Why do lenders care?

It will be a legal requirement that all OEs who either (i) own or lease UK property or (ii) disposed of UK property on or after February 2022 apply to be put on the Register.

OEs wishing to purchase or acquire UK land after 5 September 2022 will also need to show evidence of being on the Register before the Land Registry will accept its application.

Because of the retrospective nature of the ECTEA, lenders will need to look at, not only their new book of lending, but also their historic ones to ensure that any lending involving OEs fully comply with the new regime.

Facility agreements are now being drafted with specific built-in representations and covenants to ensure compliance. However, whilst finance documents that were entered into pre-ECTEA will not specifically refer to these new regulations and requirements, failure to comply may still result in a breach of undertaking and result in misrepresentations (for instance, being in breach of the "Compliance with all laws" clause often contained in finance documents).

What does this mean in practice?

It is worth noting as a starting point that (i) a lender (or security agent or trustee) does not need to register where it benefits from a charge over UK real estate and (ii) the Register is only relevant for the enforcement of real estate security but not for the enforcement of security over other assets, such as shares.

It is hoped that in practice, most OEs will register voluntarily. But whilst non-compliance with the ECTEA is a criminal offence, more importantly from a lender's perspective, it allows the Land Registry to place a restriction on the title of each property owned by an OE so that no transfer, acquisition, disposition, lease or charge shall be registered (for example, in an acquisition financing or taking security over real estate in a typical financing transaction).

There is, however, some good news for real estate lenders in terms of certain exceptions to these rules and we have focused on those most relevant below:

1) The disposing entity is a registered OE that has complied with its registration duty (unless exempt)

• Once the OE has been admitted to the Register, it becomes compliant with the ECTEA and is free to deal with its UK property, including charging it in favour of a lender or acquiring it as part of an acquisition finance.
• The OE must make annual confirmations that the existing registration and the details contained therein remain accurate.

2) The transfer, acquisition, disposition, lease or charge 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

3) The transfer, acquisition, disposition, lease or charge is made by a specified insolvency practitioner in specified circumstances.

• Whilst enforcing security is likely to become more costly, complicated and may take a little longer than usual (as the Land Registry, the insolvency practitioner and any buyer will need to be satisfied that all relevant conditions under the ECTEA are met), lenders should take comfort that their security remains in place and enforceable despite non-compliance with these new regulations.

So, what should lenders do now?

Because of the potential implications on all real estate transactions (whether historic, current or future), lenders need to be as proactive as borrowers and should, as soon as possible:

• conduct an audit of new, existing and historic lending where an OE is involved to ensure full compliance with the ECTEA (we recommend carefully considering representations and covenants specifically);
• make contact with borrowers on those 'in-scope' matters to ensure they are making the necessary applications and in a timely manner to avoid falling foul of the timeframes for registration;
• request proof of registration from the relevant OEs on all 'in-scope' matters and keep a record of this on file;
• put in place a system of monitoring those 'in-scope' matters to ensure the borrowers remain compliant with their annual obligations to ensure no events of default due to breach of covenant or misrepresentation are inadvertently triggered;
• consider making amendments to current and future finance documents to ensure compliance with the ECTEA (in terms of representations and covenants) as well as placing obligations (in terms of conditions precedent) on the OEs to provide proof of registration both now and annually; and
• ensure any heads of terms and subsequently, finance documents, reflect the requirements of the ECTEA, both in terms of including robust representations and covenants but also ensuring proof of registration and annual confirmation is a condition to lending.

Finally, financial penalties imposed on an OE could be secured by way of a charge on the OE's qualifying estate so compliance with the ECTEA is imperative.

Next steps

Whilst we would recommend that English advice also be sought, Bedell Cristin are able to provide advice on the ECTEA and what this means for your real estate transaction. If you would like any further information, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.