Economic Crime (Transparency and Enforcement) Act 2022: Points to note for lenders

The Economic Crime (Transparency and Enforcement) Act 2022 (ECTEA) requires that beneficial owners of Overseas Entities (e.g. non-UK companies, LLPs or other partnerships) which own UK property register the ownership of the Overseas Entity on a publicly accessible register known as the Register of Overseas Entities (ROE). This registration must be kept up to date at least annually in order to ensure the registration remains valid. Unless exempted, the Overseas Entities (and its officers) will commit a criminal offence if the OE owns UK property but is not registered on the ROE by 31 January 2023. There are various penalties, including fines.

To give teeth to the requirement to register on the ROE, ECTEA also brought about changes to Land Registration: the Land Registry provisions of ECTA came into force on 5 September 2022. Further details can be found in our earlier article on ECTEA here but, in summary, an Overseas Entity which fails to register as on the ROE will be unable to sell, lease, charge as security or otherwise deal with their UK property due to restrictions being registered on their legal titles at the Land Registry.

ECTEA may have implications for lenders where:
•    their UK borrowers have or will acquire and charge as security UK property purchased from an Overseas Entity and that property will be charged to a lender; or
•    they are lending to an Overseas Entity and taking security over UK Property.

If a legal charge cannot be registered at the Land Registry the security will take effect as an equitable mortgage and risks not having priority over subsequently created legal mortgages. This could have consequences for enforcement.

Here we will consider the impact that ECTEA will have on lenders at the point that security is taken over UK Property.

ECTEA may also come into play if there is an enforcement event and the Lender looks to enforce their security but this is outside the scope of this article.

Lender’s should note that ECTEA only affects security over UK real estate and a lender may have additional security which is unaffected by ECTEA. ECTEA will not, for example, affect a personal guarantee, a floating charge over non-property assets or a share charge.

Lending to a UK entity

ECTEA will not be a concern if a lender is lending to a UK entity which already owns property, or which is acquiring property from another UK entity or  from an individual (regardless of the individual’s nationality or domicile).

Lending to a borrower who is buying from an Overseas Entity

A lender will need to consider ECTEA if the Borrower is in the course of acquiring the Property to be taken as security and either the seller, or any seller in a sub-sale (if applicable), of the Property is an Overseas Entity.

The lender will need to ensure that the correct steps have been taken to ensure that the borrower’s acquisition of the Property and the lender’s charge can be registered at the Land Registry. The timing of the transaction and application to the Land Registry for registration will  dictate what the impact of ECTEA will be:

•    Land Registry applications made before 5 September 2022: If the Borrower has acquired property from an Overseas Entity, a lender will not need to be concerned about ECTEA if its security has already been completed and an application has been correctly submitted to the Land Registry for the registration of the borrower’s acquisition and the lender’s legal charge before 5 September 2022 (i.e. the date on which the Land Registry began to register restrictions on property held by OEs).

The slight but important caveat to this it that the Lender must ensure that the pending Land Registry application is not cancelled and re-submitted after 31 January 2023 as this may bring about ECTEA complications even though the underlying transaction completed before 5 September 2022. Please see our comments below.

•    Land Registry applications made after 5 September 2022 but before 1 February 2023: From 5 September 2022 the Land Registry began placing restrictions on the registered titles of property held by Overseas Entities. These restrictions prohibit the registration of any disposition (including transfers and charges) unless the Overseas Entity is registered at the ROE at the date of completion of the transaction. However, where the Overseas Entity was already the registered proprietor on 5 September 2022, the restrictions did not bite until 1 February2023.

The impact on applications to register a charge made after 5 September 2022 but before 1 February 2023 was as follows:
•    If the application was lodged and there was no restriction on the registered title, or a pending application to register one, ECTEA did not prevent the transfer to the borrower or the lender’s charge being registered
•    If the application was lodged before 31 January 2023 (i.e. before the expiry of the 6 month transitional period) and there was a restriction on the register, the restriction did not bite and so did not need to be complied with – it therefore did not matter that the Overseas Entity seller was not registered at the ROE; the Land Registry would  register the transfer to the borrower and the lender’s charge.

However, the danger for a lender is that any problem with a pending Land Registry application which requires the original application to be cancelled and a new application for registration resubmitted could have serious consequences. Those consequences being that the borrower may not be able to be registered as the legal owner of the Property and the Lender’s legal charge will take effect in equity only, not being registered at the Land Registry.

When you consider the current lengthy delays with the Land Registry in considering pending applications, it could easily be after 31 January 2023 when issues with an application come to light. If these cannot be promptly resolved, the Land Registry can cancel the initial application with minimal warning.

Lawyers acting for lenders should diligently follow up pending Land Registry applications and any queries raised by the Land Registry. This is especially important for any transactions where Borrowers have acquired land from an Overseas Entity. Lawyers should also consider whether it is possible for contractual provisions to be agreed, or undertakings agreed, whereby the ROE information is provided subsequently if it is needed. What is possible and recommended to protect the lender’s interests will depend of the facts of the transaction.

•    Land Registry applications made after 31 January 2023: With the end of the transitional period, most Overseas Entities who are selling will need to be registered before a transaction can proceed. For all applications lodged after 31 January 2023, the Land Registry will not register the transfer or the lender’s charge unless the Overseas Entity was registered at the ROE at the date the disposition (i.e. the transfer  or charge) was entered into. This is because of the way the restriction registered on the OE’s title is worded and this must be complied with before the Land Registry will consider registration. There are limited exceptions, to this, for example if the disposition is made pursuant to a statutory obligation or court order, or a contract made before the restriction was entered on the register, but in most cases these limited exceptions will not be available.

Note that non-compliance cannot be retrospectively cured – currently the ECTEA legislation provides that the consent of the Secretary of State would be required to enable registration where the Overseas Entity selling was not registered at the ROE at the time of the disposition and the circumstances in which such consent would in theory be forthcoming are very limited.

Lending to borrowers who are an Overseas Entity

The impact of ECTEA on lenders lending to an Overseas Entity has been immediate since 5 September 2022.

If the Borrower is not already registered the lender will need to make sure that the Overseas Entity is registered at the ROE before completion of the charge as an Overseas Entity without a valid OE ID number cannot be registered at the Land Registry and any standard property finance charge it enters into before it has an OE ID number will almost certainly be incapable of registration, even if the Borrower subsequently registers itself at the ROE

For a lender with existing security taken over property owned by an Overseas Entity, the Lender should liaise with the Borrower and check that the ECTEA requirement to register has now been complied with, and to keep a record of the Borrower’s ROE registration. The further assurance clause in the Lender’s legal charge and the warranties in the lender’s terms and conditions should entitle the Lender to receive this information.

A word of caution about ROE Registrations

Extra care will need to be taken for transactions which are due to complete when updates to the ROE are required. As mentioned the ROE registration must be updated annually (much like a company’s confirmatory statement). If this updating has not been dealt with (even if no changes are required) then the ROE registration may not be valid. The consequence may be that the ROE information provided to the Land Registry for the purposes of registration is not accepted, and the transaction cannot be registered as a consequence of the updating failure.

How should finance documents address ECTEA requirements?

For any new loan facilities to an OE, the question of whether the OE Borrower is has complied with its obligation to register as an ROE should be covered off at an early stage of a lender’s Know Your Client process.

The Lender should ensure that their finance documents include appropriate representations, undertakings and conditions precedent to ensure that the transaction will be ECTEA compliant upon completion and during the term of the loan.

Relevant provisions may include:
•    provision of the overseas entity ID as a condition precedent
•    an undertaking that the overseas entity will register as a ROE within a prescribed period (and we recommend that this is before any money is advanced if this is path is chosen)
•    an undertaking that the overseas entity will comply with the annual updating requirements throughout the term of the loan facility.

If you would like to discuss ECTEA and its implications, please contact Laura Keatley.