With the announcement of the general election, the passing of the Registration of Overseas Entities Bill (Bill) has been delayed. Despite this, it is expected that whatever the outcome of the election, it is a piece of legislation that will assist in the fight against money laundering.
The Bill will apply to all overseas entities (OE) which own land in the UK, including foreign companies and any legal entities which qualify as legal persons under a territory outside of the UK, for example the Channel Islands and BVI. The Bill and registration requirements will apply to both new land transactions and existing land transactions involving OEs, meaning that on any new transaction the OE must register with Companies House and a relevant restriction will be added to the Land Registry title. Where there are existing OE landowners, these OEs must register at Companies House and provide details of the registrable beneficial owners within 18 months of the Bill coming into force. In terms of timing of the actual implementation of the Bill, the latest proposal is for implementation sometime in 2021.
What is the impact on a lender's power of enforcement on new security
Concerns have been raised as to a lender's position in the event that they wish to enforce their security over UK property owned by an OE where that OE fails to comply with the registration requirements. Schedule 3 of the Bill amends the Land Registration Act 2002 so that a disposition made in the exercise of a power of sale by the proprietor of a registered charge or a duly appointed receiver, will be an exception to the restriction to be applied at the Land Registry (Schedule 3 paragraph 3(2)(d)). This means that a lender's power of sale under a charge should not be affected by the restriction even where the borrower has failed to comply with the Bill, assuming that enforcement is carried out by a receiver or under a power of sale.
You should be aware that there is no such exception for a sale by an insolvency practitioner (IP), namely an administrator, liquidator or administrative receiver. Administration would be unlikely to be used as the enforcement route on a pure real estate finance transaction, but might be used where the borrower was a trading business which held valuable real estate, for example hotels or care homes. There would be a workaround for this as the bank could still exercise its power of sale in circumstances where an IP had been appointed; however, clearly an express power for IPs to sell the property in the legislation would be more helpful.
What happens to existing security?
This depends on the form of facility and the form of documentation on which it is based. In terms of existing security for OEs owning land in the UK, some facility letters will contain an obligation to ensure compliance with laws. Such provisions should enable a lender to force the registration of beneficial ownership. A breach of the facility obligations would arguably be an event of default and so a power of sale could be exercised or considered (as mentioned above) if the OE fails to comply with the Bill.
However, the relevant obligation in the LMA REF investment finance facilities agreement is for each obligor to "comply in all respects with all laws to which it may be subject, if failure so to comply has or is reasonably likely to have a Material Adverse Effect" (Clause 22.2). Qualifying the obligation in this way muddies the waters and there would need to be an analysis of whether a breach of the registration requirements would have a "Material Adverse Effect" within the definition contained in the facility agreement. It is therefore important to consider the exact terms of the compliance with laws obligation contained in existing facility agreements in the event the bank wanted to procure compliance with the registration of overseas entities legislation.
Until the Bill is into the next stages of the legislative process and ultimately passed, it is too soon to start considering updates to precedent documents. Any obligations that are included at this stage may put off potential borrowers and so a "wait and see" approach would seem to be the best one to take for the time being. There will, however, need to be amendments in the future to deal with a borrower's obligations in the facility agreement as well as additional checks during the due diligence process.