How does the new regime work and which sectors are affected?
Once enacted, the government will have powers to call in acquisitions of control over entities or assets (called trigger events), where the government reasonably suspects that there is or could be a risk to national security as a result of the acquisition of control. The government must then carry out an assessment of the risk and, if necessary, impose remedies. For acquisitions which have to be notified on a mandatory basis, a failure to notify a transaction may result in it being legally null and void from the outset. Ouch!
Whether an acquisition will be caught by the new legislation depends on the level of control being acquired over an entity which is measured against certain thresholds of share ownership and voting rights. Control of an asset arises upon the acquisition or increase of a right to use the asset or to direct or control how it is used.
The entity over which control is being acquired must be within a key sector. The key sectors will be set out in secondary legislation. The target entity must also be either a UK entity (including company, partnership, trust etc.) or a foreign entity which carries on activities in the UK or supplies goods or services to persons in the UK. Whether it is a notifiable acquisition depends on the level of shares/voting rights being acquired. Acquisitions of assets rather than corporate entities are not subject to mandatory notification – so pure land deals do not currently fall within the mandatory regime.
There are significant penalties for non-compliance. As well as remaining exposed to call-in by the government for possible intervention on national security grounds, transactions which were not duly notified will be automatically void and the acquirer will be exposed to significant financial sanctions and/or a prison sentence.
There is 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 to consider. As to what constitutes qualifying entities or assets, the new regime includes land and tangible property and also ideas, information or techniques such as databases, algorithms, formulae and software.
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 5 years which can be shortened to 6 months after the Secretary of State becomes aware of the trigger event.
Key issues for Real Estate
Although pure land deals do not currently fall within the mandatory regime, the new regime could have serious implications for real estate.
Proximity to a sensitive site
This is the most important flag for real estate deals as a real estate transaction can fall within the voluntary notification regime if the property is “in proximity to a sensitive site”. In the government’s draft Statement of Policy Intent, which was published alongside the draft Bill, it flagged that (bold added), “The Secretary of State expects to intervene very rarely in asset transactions. However, where assets are integral to a “core area” entity’s activities or, in the case of land, the asset is in a sensitive location, their acquisition is more likely to be called in than other asset transactions… Land is generally only expected to be an asset of national security interest where it is, or is proximate to, a sensitive site, examples of which 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 clearly define what is meant by “proximate to a sensitive site”. How transacting parties and their advisors would check and rule out the intended use of land is even more challenging. There is currently no register of sensitive land or any other conclusive means of checking whether land is sensitive. Legal advisors would need to do due diligence on neighbouring sites to establish the owner and even then it would not necessarily be clear if the site was sensitive.
The Act has no de minimis thresholds which would allow smaller real estate transactions to escape potential scrutiny, even though it is highly unlikely that the vast majority would have any national security implications.
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. It is not clear from the Act itself whether a real estate deal involving, for example, a purchase or lease of a property with telecommunications equipment, or an electricity substation on site would potentially be caught by the regime and could lead to voluntary notifications to head off the risk of a subsequent call-in. While no further guidance on this has yet been given, the intention of the government cannot have been to put unnecessary barriers in the way of routine unproblematic transactions.
Impact on the Real Estate industry
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 business – 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 actually 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.