The National Security and Investment Bill will allow government intervention in transactions raising national security concerns. It will require investors in UK real estate to consider whether the regime applies and factor in any timetabling implications.
The Bill is currently being examined in the House of Lords. It will introduce an independent screening regime in the UK where a transaction gives rise to national security concerns. The regime does not exclusively screen foreign investment, as it equally applies to UK buyers and investors, and is likely to affect acquisitions across a wide spectrum of transactions. Key features of the draft Bill are discussed in our article National Security and Investment Bill which you can read here.
This article will focus on the likely impact of the Bill on real estate transactions.
Why is the Bill being enacted?
A changing balance of economic and military power globally, plus increasing competition between nations, alongside the growing emergence of powerful non-state actors, has all contributed to a need for greater protective mechanisms to guard national security. The government’s powers to scrutinise transactions on national security grounds currently dates back to 2002, and the UK is following the likes of Australia, Canada and the United States in strengthening such powers to combat such global developments.
What will the regime look like?
The regime will contain a mandatory obligation to notify the government of transactions in some sensitive areas and circumstances (there are 17 sectors explicitly targeted by the regime; see the full list here). There will also be a voluntary notification mechanism whereby entities can elect to notify, where mandatory notification is not required, but the transaction could, nevertheless, raise national security concerns. The regime provides the Secretary of State with the power to ‘call in’ transactions which have not been notified. Failure to comply may result in substantial civil fines up to 5% of worldwide turnover or £10 million (whichever is higher), and/or criminal sanctions. Significantly, transactions falling within the mandatory notification scope which are concluded without clearance will be void.
It should be noted that although a deal may fall within the scope of the new regime, this in itself is relatively unlikely to frustrate a transaction in its entirety. However, in relation to the mandatory regime, it does carry the duty to notify of the transaction, triggering a 30 business day period for clearance of the deal. For voluntary applications, the necessary step of considering whether a notification should be made may also add to delays and disruptions to proposed timetables.
One of the key features of the new regime is that it is expected to include acquisitions of qualifying assets, and land constitutes a qualifying asset. In particular, land is expected to be an asset giving rise to national security interests where it is, or has a particular proximity to, a sensitive site - such as those relating to critical national infrastructure, military bases and government buildings.
What does this mean for the real estate sector?
The Bill is currently being reviewed in the House of Lords, and if it receives royal assent in May, it could come into force in Autumn. As the regime will take retrospective effect from 12 November 2020 (and all transactions are open to review retrospectively up to 5 years after completion), investors should be taking on board the implications of the regime now, and considering what impact it will have on current and future transactions.
Particular attention should be given to transactions which relate to “high risk” key sectors, including data infrastructure, transport and energy. There is some apprehension that seemingly harmless transactions, such as leases to tenants which are within a “high risk” sector and agreements relating to telecoms companies and apparatus (such as wayleaves), could be caught by the regime.
At this stage, it is still unclear how the term “national security” will be interpreted when considering what impact the regime is likely to have in the real estate sector. However, the government has provided an example of a situation which may give rise to a national security risk and that is where a party wishes to purchase a piece of land adjacent to a sensitive Ministry of Defence facility. This has the potential to allow a hostile actor to gather sensitive information about the operations of the Ministry of Defence facility. Accordingly, it is expected that one of the key impacts of the regime in the real estate sector is where land lies in close proximity to a sensitive site. As there is currently no centralised list or database of “sensitive sites” how confident can the sector be in its identification of such sites?
The true impact of the new regime on real estate transactions will become apparent in due course. Its effect is expected to be far reaching, not least due to the fact that “national security” is not defined in the Bill, potentially affording the Secretary of State considerable discretion. The government has offered reassurance that land assets should be implicated rarely but the real estate sector will need to follow the progress, development and interpretation of the new regime with close attention.