In the Summer edition of QIA we discussed the general impact of the Economic Crime (Transparency and Enforcement) Act 2022 (“ECA”) on real estate transactions. The ECA subsequently came into force on 1 August. In this article we discuss some specific queries that may be concerning lenders.
Does a lender need to register on the ROE?
Generally speaking, a lender, whether incorporated on or offshore, does not need to register on the ROE. This is because the ECA places the obligation to register on the entity which holds the applicable real estate, not on a funder or party holding security over the real estate.
There is one exception to this: where an offshore lender elects to become mortgagee in possession and forecloses as part of an enforcement process under the terms of its security. This would result in the lender applying to the Land Registry to be registered as the proprietor of applicable real estate. In this scenario they would be treated as an overseas entity (“OE”) which needs to register under the ECA. Note that foreclosure is, in practice, a rarely used option.
Does the ECA affect the validity or enforceability of security created prior to 1 August?
No, the validity of security perfected at the Land Registry before the ECA came into force is not affected. Additionally, the ECA contains specific powers allowing dispositions of real estate held by OEs pursuant to the power of sale contained in perfected security (regardless of whether it was created pre or post commencement of the ECA) even where the OE is not registered on the ROE at the time of such disposition. However, as discussed below, outside of an enforcement scenario, there may be practical day to day operational difficulties for an OE borrower or OE developer which fails to comply with the regime created by the ECA.
For the avoidance of doubt, the validity and enforceability of security perfected after 1 August is not adversely affected by the ECA.
The need to ensure an OE retains its ROE status
Whilst much of the focus on the ECA is around ensuring the OE is on the ROE at the time that it enters into applicable dealings with real estate and applies to register them at the Land Registry, a lender will also want to ensure an OE borrower retains its registered ROE status on an ongoing basis.
This is because if an OE fails to comply with the obligation contained in section 7 of the ECA to annually update its registration on the ROE it will be deemed to not be registered (even though it may still have a Companies House assigned ID) until it complies with the updating requirement.
Whilst loss of registered status does not affect the validity of previously perfected security, it would mean that the OE itself could no longer make valid dispositions of its real estate. This could therefore prevent plot sales on a development site, a disposal of a property to a buyer, the grant of a lease of 7 years or more or the grant of new security to refinance of an existing lender.
How does the ECA affect refinances?
Where the refinance is with the existing lender, relying on existing security validly created and registered prior to 1 August 2022, the ECA will not directly be of consequence as there is no new legal charge to be registered. However, a lender will want to ensure its borrower is nevertheless in compliance so it is still able to freely deal with the real estate asset.
Where a refinance involves a new lender refinancing an existing lender, fresh security will need to be granted, so the OE will need to be on the ROE at all applicable times in order for that security to be capable of registration at the Land Registry.
- Lenders do not except in rare circumstances need to register on the ROE.
- Security that predates the ECA is not adversely affected by it.
- A lender has an interest in ensuring an OE borrower maintains its ROE beyond the point at which security is granted and perfected.
- Please refer to our article here for details on how an OE would register upon the ROE.
- For further detail generally on the implications of the ECA please click here.