Regime became live on 4 January 2022, but can look back to 12 November 2020
From 4 January 2022, the regime is fully live and it is now possible to make a notification, mandatory or voluntary, to the Department for Business, Energy and Industrial Strategy (BEIS). The regime has retroactive application in that the government has the power to call-in for review, transactions which closed on or after 12 November 2020.
Real estate deals
Although pure land deals do not fall within the mandatory regime, the new regime could have implications for real estate. A real estate transaction can fall within the voluntary notification regime if the property is “in proximity to a sensitive site”. In November last year, the government outlined its intended use of the call-in power. It flagged that, “Acquisitions of control over qualifying assets are also in scope of the call-in power. This is principally so that acquisitions may be called in if control of an asset is acquired instead of an entity that owns it, or in the event that an asset, such as land, is located near a sensitive site, which may give rise to a national security risk.”
The government stated that: “Land is mainly expected to be an asset of national security interest where it is, or is proximate to, a sensitive site. Examples of such sensitive sites include critical national infrastructure sites or government buildings. However the Secretary of State may also take into account the intended use of the land.” The Act does not define what is meant by “proximate to a sensitive site”. How transacting parties and their advisors will check and rule out the intended use of land remains to be seen. There is currently no register of sensitive land or any other conclusive means of checking whether land is sensitive. Will transacting parties need to do due diligence on neighbouring sites? Even then it would not necessarily be clear if the site was sensitive.
The mandatory and voluntary regimes work in different ways
Mandatory notifications are required for ‘qualifying transactions’ in 17 key sectors identified under the regime (see our previous Engage piece on Strengthening the defences listed in the related materials). Under the mandatory regime, the target entity must be within one of those sectors and be a UK entity. Foreign entities can also be caught if they carry on activities in the UK - the supply of goods or services from abroad to persons in the UK is not in itself sufficient to be caught by the mandatory regime, unless the specific definition contemplates supply (eg critical suppliers to the government). Whether it is a notifiable acquisition depends on the level of shares/voting rights being acquired.
Pure land deals do not currently fall within the mandatory regime because acquisitions of assets rather than corporate entities are not subject to mandatory notification. But there is also a voluntary notification process for trigger event transactions (for qualifying assets as well as qualifying entities) which are not in one of the key sectors but where there may still be a national security issue. As to what constitutes qualifying entities or assets, the new regime includes land and tangible property.
As this is a voluntary regime, transacting parties can choose not to make a notification, but they risk a subsequent call-in for review where the government reasonably suspects that there is or could be a risk to national security as a result of the transaction. This power lasts for five years which can be shortened to six months after the Secretary of State becomes aware of the trigger event.
Telecoms, Data Infrastructure and Energy
The key sectors which have been identified by the new regime as potentially raising national security issues include telecoms, data infrastructure and energy. Although not clear from the Act itself, it seems unlikely that a real estate deal involving a purchase or lease of a property with telecommunications equipment, or an electricity substation on site, would potentially be caught by the regime. The intention of the government cannot have been to put unnecessary barriers in the way of routine unproblematic transactions.
Missing a mandatory notification requirement has criminal ramifications
Missing a mandatory notification can result in substantial civil and criminal penalties in addition to the deal being legally void from the outset.
Although the Act will bring the UK more into line with regimes seen in many other countries, certain aspects of the Act may create concerns for the real estate industry particularly given the UK’s historically open stance towards foreign investment in real estate. While in practice the new regime will be more focused on foreign investors, legally it applies to all acquirers regardless of nationality so domestic investors will also need to bear in mind the notification obligation for deals in the key sectors and the risks of a call-in more generally.
Authored by Jane Dockeray and Ingrid Stables.