The Register of Overseas Entities: what is it and why should lenders take note?

Executive summary

The ECA creates a new ROE at Companies House which contains details about overseas entities which own UK property. For the purposes of the ECA, an overseas entity is a company or other entity such as a partnership or trust that has a legal personality under its governing law and is governed by non-UK law.

Note: There is currently no guidance on what constitutes an exempt overseas entity – the secondary legislation dealing with this has not yet been published.

Where a lender has existing security or is taking new security from an overseas entity and that security takes the form of freehold property or a leasehold interest granted for a term of seven years or more in the UK (Qualifying Estate), the lender must be aware that there are additional due diligence requirements, and in some cases additional legal drafting requirements, which are required to protect the lender’s security.

The reforms introduced by the ECA and the ROE will mainly be of concern to a lender where it takes a specific charge over a Qualifying Estate owned by an overseas entity, such as in a legal charge / mortgage or where the Qualifying Estate is specified in a debenture.

However, even in situations where the ECA and the ROE do not appear to be directly relevant to a transaction, there are still steps which lenders should take in the interests of prudence.

For more information about the legal obligations created by the ECA for overseas entities and the implications of non-compliance, see our article on the legal context of the Register of Overseas Entities here.

Effect of the Register of Overseas Entities on security

Granting new security

Failure by an overseas entity to be registered on the ROE will prevent any legal charges taken by a lender in respect of a Qualifying Estate from being registered against the title of the Qualifying Estate as the disposition will be caught by a Land Registry restriction – see our article on the legal context of the Register of Overseas Entities here. A failure to register the legal charge will therefore mean the legal charge will only take effect as an equitable charge until and if it is registered, and this has consequences for enforcement (see below).

Enforcing security

If an overseas entity which has granted the lender security over a Qualifying Estate fails to comply with the ECA and ROE requirements:

(1) Legal charges registered on the title of the Qualifying Estate

Provided the legal charge has been registered on the Land Registry title, the lender should be able to enforce its security through one of the specified exceptions contained in the ECA which provide that dispositions (including a transfer) made:

• (i) in exercise of a power of sale conferred on a registered charge holder or their receiver; and/or
• (ii) by an insolvency practitioner in certain circumstances (which are expected to include sale by a receiver or overseas equivalent, but the specific secondary legislation is yet to be published),

…will not be prevented by the Land Registry restriction.

(2) Legal charges not yet registered on the title of the Qualifying Estate

Where the legal charge has not yet been registered on the Land Registry title, the lender will have an equitable charge rather than a legal charge over the Qualifying Estate, which is a less secure form of security as against other secured creditors and which is subject to legal uncertainty as to methods of enforceability.

In this situation, the lender may be able to enforce its security through the specified exceptions which provide that dispositions (including a transfer) made:

• (i) pursuant to a security document dated before the restriction was entered on the title; and/or
• (ii) by an insolvency practitioner in certain circumstances (which are expected to include sale by a receiver or overseas equivalent, but the specific secondary legislation is yet to be published),

…will not be prevented by the Land Registry restriction.

However, lenders should be cautious about relying on the potential availability of one or more of the specified exceptions referred to above. The application of such exceptions is currently untested and it is not clear how the courts or the Land Registry will interpret and apply them. Lenders should therefore proactively seek to ensure that any relevant overseas entities are in compliance with their ECA and ROE obligations rather than risk relying on the exceptions.

Steps for lenders to take

Existing finance arrangements

(1) Conduct an audit of existing security

Lenders should conduct an audit of their existing security arrangements to identify whether they have any security interests which:

• (i) have been granted by overseas entities; and
• (ii) are over a Qualifying Estate.

(2) Contact any borrowers related to the overseas entities identified in the audit

Once a lender has identified any such existing security arrangements, it should contact the borrower entity for the relevant transaction to inform them of the ECA and ROE obligations on the overseas entity and request evidence of the overseas entity’s compliance.

An overseas entity can demonstrate its compliance with the ROE requirements by providing the lender with its overseas entity ID or with evidence that it’s an exempt overseas entity.

If the borrower or overseas entity is not forthcoming with the required information, the lender should point to any representation or undertaking which requires the overseas entity to remain in compliance (or the borrower to ensure its compliance) with all legislation applicable to it, and to any further assurance clause contained in the relevant loan documentation.

New finance arrangements

(1) Due diligence

When a lender proposes to take security over a Qualifying Estate from an overseas entity, it should ensure that the overseas entity is on the ROE and in compliance with its updating obligations, or that it is an exempt overseas entity.

A lender can do this by inserting a condition precedent in the facility agreement or relevant finance document. The condition precedent should require the overseas entity to provide the lender with evidence of its compliance with the ECA (including but not limited to its overseas entity ID) or with evidence of its exempt status.

(2) Representations and undertakings

It is not essential for a lender to amend its standard documents to incorporate any additional representations or undertakings which deal specifically with the ECA. This is because compliance with the ECA will fall within the scope of a typical ‘compliance with all laws’ representation and/or undertaking.

However, a lender might wish to include in the facility agreement an undertaking which provides that any overseas entity shall (i) comply with its obligations under the ECA (including but not limited to registering on the ROE and keeping such register updated as required by the ECA); and (ii) provide the lender with evidence of its compliance on request. Such an undertaking will draw the attention of the borrower and the overseas entity to the obligations contained in the ECA and ensure continued compliance with them.

(3) Where the Economic Crime Act or Register of Overseas Entities doesn’t apply directly but may be relevant 

If a debenture is taken over ‘all property of the overseas entity’ and no Qualifying Estates are specifically mentioned, then whilst there won’t be any issues related to registering the lender’s security at the Land Registry, if the lender enforced that security there could still be issues when transferring the property to release the proceeds of sale if the sale was caught by a restriction due to the overseas entity not being registered on the ROE. As such, it would be prudent for lenders to carefully consider the advice set out in ‘Representations and undertakings‘ above.

If you need any legal advice in relation to the new ECA and ROE regime, or if you would like to learn more, please get in touch with one of the experts in our Banking & Finance team.

This article was originally posted on 28 October 2022 and update don 10 March 2023.