The new rules brought in by the Economic Crime (Transparency and Enforcement) Act 2022 apply immediately to overseas entities buying UK land, while existing overseas owners as of 1 August 2022 have until 31 January 2023 to register. Non-compliant overseas entities are restricted from buying, selling, letting or charging UK land and commit criminal offences potentially resulting in unlimited fines and/or imprisonment (as well as facing potential administrative penalties).

Why has the regime been implemented now?

The government's aim is to increase public trust and transparency and to combat the use of UK land by overseas entities to launder or invest illicit funds.  While first proposed over five years ago, the new regime was fast-tracked following Russia's invasion of Ukraine when identifying beneficial owners of UK land became critical to sanctions implementation.

Chancellor Kwasi Kwarteng (from gov.uk Press Release): "Our new Register of Overseas Entities, the first of its kind in the world, will have an immediate dissuasive effect on oligarchs attempting to hide their ill-gotten gains, ensuring that the UK is a place for legitimate business only."

The new regime supplements the existing disclosure regimes for beneficial owners of UK companies and trusts, but borrower failure to comply with the new regime has a more significant impact on transactions.

Lenders should act now to address ROE regime impact

If a lender has a land registry registered mortgage over UK land, it can exercise its power of sale even if an overseas borrower fails to keep its registration updated (and overseas lenders do not themselves need to register on the ROE to take security over UK land).

However, lenders should adapt their documentation and policies for UK real estate lending to overseas entities (especially where the loan is secured on UK land) including by:

• Requiring an up-to-date borrower ROE registration as a condition precedent to the lender taking a mortgage over UK land. This enables the mortgage to be registered at the land registry, one of the criteria for the lender power of sale exemption.
• Including ongoing ROE compliance obligations to mitigate risks such as cashflows being impacted if the borrower cannot implement leasing or sale strategies or is fined for non-compliance (and the risk of unpaid administrative penalties being secured by a charge on the land).
• Addressing potential proceeds of crime issues and reputational risks where borrowers commit criminal offences. For example, by granting a mortgage in breach of the new rules or failing to complete an annual update.
• Addressing potential enforcement issues if only equitable security is taken over the UK land at the outset.

Download the Clifford Chance briefing for secured lenders here for more information.

A registration backlog seems inevitable

More than 32,000 existing overseas owners need to register on the ROE by 31 January 2023 but fewer than 1,000 registered in the first eight weeks.  The rate of registrations needs to quicken significantly and a resulting backlog in processing applications seems inevitable (see Chart 1). 

While existing overseas owners need only apply before the deadline, existing overseas owners intending to charge, lease or sell UK land after the deadline will need a completed registration. Overseas entities also already require completed registrations to buy UK land so long processing times will impact transactions. An early registration application is the key to avoid being caught out. 

Chart 1 (Source Clifford Chance LLP):