Emma Cordiner provides a timely reminder that the transitional period on the Economic Crime (Transparency and Enforcement) Act 2023 is about to expire. With just days until the deadline, Emma recaps on what the legislation requires.
Economic Crime (Transparency and Enforcement) Act 2022: Key Points to Note in January 2023
As part of the government’s bid to make UK property ownership more transparent, the Economic Crime (Transparency and Enforcement) Act 2022, or “ECTEA”, was enacted in March 2022 and largely came into effect on 1 August 2022, with practical application to real estate transactions with effect from 5 September 2022.
At this point in time, late January 2023, the transitional period applicable to many key provisions of ECTEA is just about to expire. Here, we will briefly recap the requirements for overseas entities owning UK property as at 31 January 2023, and take a look at some key points that any entity owning, or seeking to own property in the UK (note, this overview deals with application in England and Wales), now needs to be mindful of – whether they are an overseas entity or a party looking to transact with an overseas entity.
What did ECTEA do?
ECTEA introduced a new register of overseas entities at Companies House on 1 August 2022. The impact of this is significant, and also retrospective.
ECTEA’s definition of overseas entity is broad and as it stands, no regulations have been made so as to identify any exempt overseas entities (although there is scope for this). For now, it should be assumed that ECTEA applies to any overseas law-governed corporate body, partnership, or other entity which is not a “natural person” (and so we have not further referenced the concept of exempt overseas for the purposes of this note).
Any overseas entity acquiring a freehold interest in property or a lease for a term of more than seven years (a “qualifying estate”), must have registered the details of its beneficial ownership on the new register at Companies House. If it has not, it will not be able to apply to register its interest at the Land Registry – this means it will not ultimately be able to acquire legal title to the property.
ECTEA is retrospective too in that it requires any overseas entity which acquired a qualifying estate on or after 1 January 1999 to 31 July 2022 to register details of its beneficial ownership on the Companies House register during ECTEA’s transitional period – this period expires on 31 January 2023. Failure to comply means that the entity won’t be able to transfer the property, or grant a legal charge over it, or a lease of it for more than seven years. Moreover, the entity and its officers will have committed a criminal offence.
Registration of beneficial ownership details is not the end of the matter: details must be up to date – ECTEA imposes annual updating obligations on overseas entities, although updating periods can be shortened (which may prove useful if seeking to contractually oblige a party to a transaction to update its beneficial ownership details ahead of a key transaction dates such as exchange or completion). Failure to comply with updating duties is a criminal offence.
Property transactions: the questions to ask and expect going forward
When their prospective buyers and tenants of qualifying estates are overseas entities, sellers and landlords need to know that these entities are registered on the Companies House register, have an ID number and that they have complied with their updating duties so as to be satisfied that they will be able to become the registered proprietor of property. This is important for sellers looking to dispose of property and the liabilities that come with property ownership, and important for landlords who need to be certain that their tenants are “tenants at law” and capable, for example, of receiving certain notices which may be served under a lease: break notices, 1954 Act notices and the like. Buyers and tenants will likewise want to make the same checks in respect of overseas entity seller and landlords to make sure that they can actually dispose of property being purchased. Lenders taking legal charges over property owned, or to be acquired by overseas entities will need to make such checks of their overseas entity borrowers. All of these checks will become standardised within due diligence processes as ECTEA embeds.
Parties dealing with overseas entities should look for contractual protection in transfer and lease documentation: indemnity-backed obligations on overseas entities to be and to remain appropriately registered and otherwise ECTEA-compliant, and to properly submit (where relevant) all requisite information as part of any Land Registry applications flowing from property transactions. Lenders will need to impose, and borrowers should expect to have to satisfy and comply with, appropriate conditions-precedent and loan covenants, dealing with borrowers’ overseas entity register registration, and the updating of beneficial ownership details.
How ECTEA is imposed in practice
What will make ECTEA bite in practical transactional terms? The Land Registry will place a restriction on the title of every qualifying estate where it is satisfied that an overseas entity is the registered proprietor, and that it became so pursuant to an application made (to the Land Registry) on or after 1 January 1999 and before 1 August 2022. The restriction will have the effect of prohibiting the future registration of transfers, leases for a term of more than seven years, and the grant of legal charges, unless at the time of the disposition, the overseas entity:
- is registered and has complied with its updating obligations; or
- is exempt (albeit as above, there are not yet any exempt overseas entities identified); or
- a statutory exemption applies to the disposition. The statutory exemptions are dispositions:
- made by operation of law or, pursuant to a court order or a statutory obligations;
- made pursuant to a contract pre-dating the entry of the restriction on to the register;
- made pursuant to the exercise of a registered chargee’s power of sale or a receiver appointed by such chargee;
- to which the Secretary of State consents – note, this power is narrow, dealing with disponees that could not have known about the prohibition on a disposition, and further regulations may yet be made; or
- made by a “specified insolvency practitioner” – this definition has not yet been legislate for.
The restriction entered on to the register will take effect on expiry of ECTEA’s transition period i.e. 31 January 2023.
For overseas entities seeking now to become the registered proprietor of qualifying estates, they won’t be able to apply to the Land Registry to register their property interest, without having complied with ECTEA and having provided the relevant information within their application to the Land Registry. As above with existing qualifying estates, a restriction (taking immediate effect) will be placed on the title to the property prohibiting the registration of transfers, leases of more than seven years, and the grant of legal charges.
ECTEA makes it a criminal offence for an overseas entity (and every officer in default) to make a registerable disposition which cannot be registered, whether because the restriction on title cannot be complied with, or because the overseas entity has not complied with the applicable overseas entity registration rules.
Given that the thrust of ECTEA is transparency of property ownership, even if as at 31 January 2023 a particular overseas entity is no longer the registered proprietor of a qualifying estate, it may still need to provide information to Companies House in respect of relevant dispositions of property between 28 February 2022 and 31 January 2023 and its beneficial ownership at that time. Again, there are criminal sanctions for non-compliance.
On a practical level, ECTEA raises additional due diligence points as above for parties to property transactions and those advising them. There will also be extra considerations around the mechanics of certain transactions – overseas entity sellers, landlords and mortgagors/borrowers need to be registered/compliant at the time of a disposition. Buyers, tenants and mortgagees need to be registered/compliant at the time of application to register the disposition at the Land Registry. In some cases a party will wear more than one hat – one simple example is the overseas entity mortgage-funded buyer – it’s not until it makes its Land Registry application to register its newly-acquired property that it needs to be on the overseas registered for ECTEA purposes – but it can’t buy the property without the mortgage and it can’t grant the necessary legal charge over the property unless it is registered/compliant with ECTEA at the point in time where it grants the legal charge. The transfer and registration mechanics of multi-party transactions will also warrant additional attention for example, a sub-sale of property where the intermediate party is an overseas entity.
Note, where property is being transferred by way of share sale, whilst Land Registry mechanics will not come into play, questions around an overseas entity target’s registration status will be just as pertinent from a legal compliance perspective, as they will be if a legal charge is being granted as part of the wider transaction.
Where there are overseas entities as parties to transactions, heads of terms might now usefully make reference to evidence of overseas entity registration to get this point in hand early on at a commercial level, as well as appropriate broader reference to contractual provisions to deal with the point.
ECTEA has the potential to be hugely consequential for non-compliant overseas entities and their officers, with the threat of both criminal sanctions the scope to prevent dealings with, or raising capital against property. Therefore, where businesses are transacting UK property using overseas entities, or where such entities are otherwise a party to such transactions, ECTEA requires careful attention to be paid to any overseas entity’s registration status, and in turn its ability to dispose of or register its interest in property, as the case may be.