Non-UK entity lending take note!

The Economic Crime (Transparency and Enforcement) Act 2022. Navigating the pitfalls for lenders.

The Economic Crime (Transparency and Enforcement) Act 2022 requires overseas companies or entities which own or purchase UK property to list their details on a public register. The intention of the Act is to deter money laundering by making the identity of individuals who ultimately own or control overseas entities known.

The UK Land Registry will not register an overseas entity as the registered owner of most interests (including many leases) in UK real estate without evidence that the beneficial owner of the overseas entity is registered at Companies House.

Where an overseas entity already owns a qualifying interest in UK real estate, the Land Registry will enter a restriction on the title of the property (meaning it can’t be sold, charged or otherwise dealt with) if the overseas entity has not registered their beneficial ownership at Companies House by 31 January 2023.

What issues may arise for lenders?

We propose to lend to an overseas borrower who owns UK property but has not registered its beneficial ownership with Companies House.

Issue: The overseas entity borrower must register and obtain an entity ID from Companies House, or the lender will not be able to register its charge over the property.

Action: A lender should stipulate a condition precedent showing that the overseas entity is property registered (and the relevant ID has been obtained) and include ongoing covenants for the borrower to update the register annually (providing evidence of this to the lender where necessary).

We propose to lend to a UK borrower who is acquiring UK property from an overseas entity who has not registered its beneficial ownership with Companies House.

Issue: An overseas entity seller will have a restriction on its title which will prevent it from selling unless it has registered its beneficial ownership at Companies House. If the seller cannot validly transfer the property to the buyer then the lender cannot register its charge against the property.

Action: A condition precedent should be included which requires evidence that the overseas entity seller is registered and has obtained the necessary entity ID.

We have an existing overseas borrower who owns UK property over which we have a charge. The overseas borrower has not yet registered its beneficial ownership with Companies House.

Issue: If an overseas entity borrower does not register its beneficial ownership, the lender may not be able to enforce its security. There are limited exceptions available to a lender here but a lender should ideally seek not to rely on those where it can avoid them. Failure to register is a criminal offence (punishable by a daily fine of up to £2,500) which also gives rise to regulatory and reputational issues for a lender.

Action: Speak to your borrower and encourage them to register failing which a default is likely to arise under the terms of your facility documentation which will have adverse consequences for your borrower.

General action to take now

All lenders should be reviewing their loan books to determine whether any of their borrowers might need to register. In addition, lenders should review their standard loan documentation to ensure that it includes the appropriate obligations on its borrowers in order to ensure they are adequately protected.

If you have any queries on the above please do get in touch with a member of our banking team.