Owners and buyers of UK land need to be aware of new government powers under the National Security and Investment Act 2021 that will come into force on 4 January 2022 (the ‘NSI Act’).
From that date ‘the government will be able to scrutinise and intervene in certain acquisitions made by anyone, including businesses and investors, that could harm the UK’s national security. The government will be able to impose certain conditions on an acquisition. In rare instances, the government may unwind or block an acquisition completely’.
The NSI Act contains, amongst other things, a mandatory obligation to notify to the new Investment and Security Unit (‘ISU’) of BEIS acquisitions above 25% of entities (i.e. companies, bodies corporate, LLPs, partnerships, trusts, unincorporated associations) that operate in 17 sectors deemed sensitive in relation to national security. However, there is no mandatory notification obligation in relation to other ‘qualifying acquisitions’ being certain acquisitions ‘that could harm the UK’s national security’.
The government has an overarching power under the NSI Act to impose conditions on qualifying acquisitions or possibly to block or unwind them. This includes acquisitions of land, large or small, that occur after 11 November 2020.
Land is not defined in the NSI Act but we assume it includes freehold, leasehold, interests such as rights of way, possibly mineral rights, land options and conditional acquisitions. A key risk to assess will be: does the land right acquired give a power to use or direct or control the land’s use. It can apply to land outside the UK in limited circumstances not discussed further here.
Land transactions that could be affected
So, what types of land acquisitions does the Government have in mind?
The 17 sensitive sectors for mandatory notification are the most relevant and are expressly referred to in paragraph 31 of the draft Section 3 Statement (see below). That list is as follows:
- advanced materials
- advanced robotics
- artificial intelligence
- civil nuclear
- computing hardware
- critical suppliers to government
- cryptographic authentication
- data infrastructure
- military and dual-use
- quantum technologies
- satellite and space technologies
- suppliers to the emergency services
- synthetic biology
This is a very wide list, but simply acquiring an interest in land of itself does not give rise to any mandatory obligation to notify ISU.
There will be a risk to any buyer of land where that acquisition ‘could harm the UK’s national security’. The list demonstrates sectors that are expressly linked by the NSI Act to national security and so land transactions that somehow have a connection with those sectors, or activities closely linked to them, could come under government consideration. But note, land acquisitions involving sectors in the wider economy could also harm national security and be ‘qualifying acquisitions’.
Approach for affected land transactions
A qualifying acquisition of land could be a direct acquisition of land as well as the acquisition of land held through a corporate entity. It also potentially catches corporate reorganisations where corporate entities holding land become controlled by a different entity in the same group even though the ultimate beneficial owner of the group will not change.
The buyer will have to consider if the government is likely to think that its proposed land acquisition will harm national security. In most cases, this is unlikely to even occur to anyone. However, the NSI Act creates the need to consider this carefully.
The government guidance is in BEIS’s Statement of policy intent and the more up to date current draft ‘Section 3 Statement’ (which is under consultation until 30 August) which sets out the government’s likely approach to exercising its ‘call in’ power (see below). Under the latter, three risk factors will be considered:
- Target risk – this concerns whether the target of the qualifying acquisition (the entity or asset being acquired) is being used, or could be used, in a way that poses a risk to national security
- Acquirer risk – this concerns whether the acquirer has characteristics that suggest there is, or may be, a risk to national security from the acquirer having control of the target
- Control risk – this concerns whether the amount of control that has been, or will be, acquired through the qualifying acquisition poses a risk to national security. A higher level of control may increase the level of national security risk
The risk factors will be considered together, but an acquisition may be called in if any one risk factor raises the possibility of a risk to national security.
So, for land acquisitions there would appear to be three key factors to consider here:
Identity of buyer
The first is the identity of the buyer itself (or any one of them if the asset is to be held jointly) – the ‘acquirer risk’. This is the most obvious risk. The characteristics of the buyer are very key in assessing any potential threat to national security. The draft Section 3 Statement says at paragraph 21:
Characteristics of the acquirer such as the sector(s) of activity, technological capabilities and links to entities which may seek to undermine or threaten the interests of the UK, including the integrity of the UK’s democracy, the UK’s public safety, the UK’s military advantage and the UK’s reputation or economic prosperity, are likely to be considered in order to understand the level of risk the acquirer may pose. Some characteristics, such as a history of passive or longer-term investments, may indicate low or no acquirer risk.
Paragraph 22 says:
In assessing an acquirer, the Secretary of State may consider several factors, including:
- the ultimate controller of an acquirer, or if the acquirer can be readily exploited;
- whether the acquirer may pose a risk to national security in the light of their pre-existing holdings;
- whether the acquirer, or their ultimate controller, has committed, or is linked to, criminal or illicit activities that are related to national security, or activities that have given rise to or may give rise to a risk to national security.
Paragraph 23 says:
If an acquirer has links to entities which may seek to undermine or threaten the interests of the UK, this does not automatically mean that their acquisition(s) will be called in
Paragraph 27 says:
The Secretary of State will not make assumptions based on an acquirer’s country of origin. However, an acquirer’s ties or allegiance to a state or organisation which is hostile to the UK will be considered when assessing whether their qualifying acquisition has given, or may give, rise to a risk to the UK’s national security
In practice, the first question about a buyer is likely to be: is it an entity or individual based in, born in, living in, connected with, controlled by or owned by a foreign state, that is viewed by the government as carrying out or likely to carry out activities that could harm the UK’s national security, or likewise by an organisation or individual that could harm the UK’s national security? In that regard it should be assumed that this would include states, organisations or individuals who are opposed to the UK’s key allies with whom the UK cooperates in relation to security matters as well as organised crime gangs, often having links to a particular country.
This will mean that a level of initial due diligence and vetting will have to be done for a buyer whose country of origin is a hostile state. A seller might want to do this (see below).
The second is to identify what the land is currently, or intended to be, used for (the ‘target risk’). The sensitive sectors above are a useful guide as to where the government think the obvious risks are. If the land is to be used for any of the sensitive sectors, then the identity of the buyer will clearly be a key factor (but it should not be assumed that if the buyer were viewed as benign, this would make consideration of the use or location of the land any less important on its own).
It would need to be shown that the acquisition of the land interest and the ability to use, or direct or control the use of, the land could pose a threat to national security (‘control risk’). This also applies where following a transaction any existing ability to direct or control the use of the land is increased. An example given is where a person who previously owned a right of way near a sensitive site, then acquired the land over which the right of way existed. Loans secured on land are not of themselves expected to be the type of right which would be called in but then taking the land to satisfy the loan could be a qualifying acquisition.
In most cases the owner of land will have significant control rights so land ownership of itself generally gives rise to high control risk.
Then there is the need to consider target risk. Are any sensitive activities carried out on the land itself? Most obvious of the listed sensitive sectors would be civil nuclear, communications, data infrastructure, defence, energy, military and dual use and transport, but outside the sensitive list one could add water utilities, the food supply chain (which could include farm land if acquired at sufficient scale), rare earth metal extraction, and, topically, the manufacture of medicines such as vaccines (although the government has stated that it is unlikely they will call in transactions not connected to the 17 listed sensitive sectors).
The type of threat could include an ability of the buyer to block physical access, impede development, have legitimate access to sensitive data (for example as an owner of common parts being able to track goods in and goods out) or carry out covert surveillance or espionage.
The third is the location of the land. Even if the land itself is unconnected with the carrying out of any of the sensitive activities, is it close enough to land where sensitive activities are carried on to be a threat? Again, could it be used for the carrying out of surveillance or espionage or to block key access routes, disrupt communications or even to launch some sort of attack?
Land location therefore additionally gives rise to both control risk and target risk (as well as acquirer risk). There is no full guidance on what amounts to a sensitive site although brief reference to critical national infrastructure sites or government buildings and an example of a site that could be close enough to an MoD building to enable espionage. Also, there is no guidance as to how close amounts to ‘proximity’ – it is clearly further out than ‘adjacent’.
The draft Section 3 Statement gives the following example (of where the land acquisition is unlikely to be called in) where land location is the key a factor:
Company A has bought Building B located in the UK for residential use. Building B is a house adjacent to a sensitive military site. Company A is an overseas pharmaceutical company that is known to the UK Government with no evidence of ties to hostile activity in the UK.
The control risk is high as Company A has purchased the asset outright, enabling Company A to use or to control or direct Building B’s use.
The target risk is medium, as there is a proximity risk as the target is adjacent to a sensitive site, but it is unlikely that owning the adjacent property for residential use could pose a risk to national security, given other security protections in place at the military site.
The acquirer risk is low, as there is no evidence to suggest that the acquirer, Company A, is linked to hostile activity, so the possibility of the target being used to threaten the UK’s national security is low. Company A has also demonstrated that it intends to use the asset as a place of residence, which does not pose a national security risk in directing the asset for this use.
Therefore, this acquisition is unlikely to be called in.
This example whilst superficially helpful, does not explain what the key factor would be in making the decision not to call in. Can it really be assumed that residential use next to a military site does not give rise to a threat to that site because the site is already securely defended? It would be more helpful to have an example of where such a transaction would be called in. If the pharmaceutical company was carrying out chemical processes that could, if they went wrong, cause a large explosion that would damage the military site would that make a difference?
A use could and very often will change after a site has been acquired. The planning system should pick up any threats to the adjacent sensitive site, but the government would be concerned if carrying out activities close by created a high risk of damaging essential national security infrastructure because of an accident of some sort.
The biggest threat to national security must be hostile actors, which pushes you to conclude that the key risk is acquirer risk. It seems unlikely that the government will adopt a risk policy just based upon what could potentially be done at a site next to a sensitive site – the risk would need to be obvious and high otherwise this could render any land next to a sensitive site worthless.
Uncertainty created by NSI Act
The NSI Act introduces uncertainty for acquirers.
It affects land transactions significantly because most of the sensitive sector entities conduct their activities on land (which they will very often not own) and land in the vicinity of such activities will also be potentially caught. This will require greater initial due diligence not only in relation to land being acquired but also neighbouring land, just so a buyer can identify any NSI Act risks. It also has implications for acquirers of entities operating in the wider economy, but which happen to own land where sensitive activities are carried on or in the same vicinity.
A buyer of land will have to consider all the risks and may struggle to take a view. That may be policy in that it will flush out more transactions and give the government a better insight into land transactions and the people who acquire sensitive sites or sites in their proximity.
The buyer’s main concern is the government’s ability under the NSI Act to ‘call in’ an acquisition within the earlier of 5 years of it occurring (on or after 12 November 2020) and 6 months of it becoming aware of the transaction if it reasonably suspects it may give rise to a national security risk.
If a transaction is called in, the Government may impose conditions on the acquisition, unwind or block the transaction in whole or in part. This is where the uncertainty arises. Paragraphs 32 and 33 of the Draft Section 3 Statement say however:
- The Secretary of State expects to call in rarely acquisitions of assets which are not in areas linked to the 17 areas of the economy.
- Overall, the Secretary of State expects to call in acquisitions of assets rarely and significantly less frequently than acquisitions of entities
To deal with the uncertainty created, the legislation provides for voluntary notification to ISU of transactions by buyers or sellers before they complete. The process can take between 30 and 105 days.
Following the notification to ISU, the government has an assessment period of 30 days to decide whether or not to take further action and call in.
If it clears the transaction, the clearance will not be capable of being reviewed unless false or misleading information was provided in the notification. This gives the buyer the certainty it needs. A buyer can complete the transaction during the assessment period unless subject to an interim order preventing this; but will do so at its own risk.
If the transaction is called in after voluntary notification, then the process takes another 30 to 75 days and the final government decision will be to clear it, impose conditions or unwind it in whole or in part.
Effect of voluntary notification procedure
The lack of more specific detail around land transactions in the guidance on when land transactions are more likely to be called in could lead to more voluntary notifications than government was expecting. As mentioned, most entities operating in sensitive sectors use land themselves, often owned by somebody else and there is always neighbouring land. So, the potential for the application of the NSI Act will arise very frequently.
Whilst an ‘innocent’ buyer that has a connection with any of the hostile actors referred to above is likely to make a voluntary notification, for other ‘innocent’ buyers their instinct could be not to do so especially in light of the government’s statement that it expects to call in asset acquisitions rarely. For the reasons stated above, this may be a mistake as the use of the land for sensitive purposes or its proximity to land where sensitive activities occur are factors just as important as the identity of the buyer.
Whilst equity investors in land are used to making value judgments about risk, the same cannot be said of senior secured lenders who seek to exclude risk as much as possible. They are likely to want, in circumstances where a risk is possible, even if unlikely, either a voluntary notification to be made by the buyer to ISU or enhanced due diligence on the property, its use or uses and its location relative to land where sensitive activities are carried on (and even then conclude that a notification should be made). Given the relative costs of the two, the buyer may prefer to make a voluntary notification. Since most land purchases require senior debt, expect notification and clearance to be a condition precedent to any debt facility where risks are identified.
And then there is the other unexpected consequence. For sellers. They will not want any risk of a sale of land being unwound. That would mean having to pay back the money. Disaster. Expect sellers to want to notify themselves or want notification and clearance to be a condition to any sale contract, or at any rate sellers will need to be satisfied as to why there is deemed to be no risk. Sellers are likely to be more sensitive about the background of people they sell to.
It would be useful if government could clarify what will happen legally to land title if a land transaction is called in and the transaction is ordered to be ‘unwound’ it would also be helpful to understand what types of conditions on ownership or use of the land are likely to be imposed. These are the main areas of uncertainty for buyers, lenders and sellers.
The NSI Act is going to influence certain land transactions in the future and the property world needs to be prepared.
- a need for greater investigation into purchasers and potential connections with hostile actors- this will add to sellers’ costs and add to the deal timetable
- greater due diligence into the use of the land being acquired – does it include activities that fall within sensitive sectors (whether or not on the list) – this could substantially increase marketing and acquisition costs and will add to the deal timetable
- greater awareness of the use of any land in the vicinity of or adjacent to the land being sold – again does it include activities that fall within the sensitive sectors (whether or not on the list) – again this could substantially increase marketing and acquisition costs and will add to the deal timetable
- buyers, their banks or sellers may include deal conditions which require voluntary notification and clearance of the land transaction
- possibly some effect on the value of land where sensitive activities are carried on or land in the same proximity.
Landowners who completed purchases or conducted corporate reorganisations involving land owning subsidiaries since 11 November 2020 should review those transactions to see if they should make a voluntary notification after 4 January 2022 when the NSI Act comes into force. Their banks may also ask for this.
Whilst commercially more guidance on land acquisition specifically would be welcome, particularly the practical consequences for legal title if a transaction is unwound, no doubt the government would prefer to keep its powers wide and options open. It won’t want to provide, for example, a list of hostile actors and narrow the call-in guidance down in a way that could encourage circumvention.
It will be a matter of time before the government’s practice develops and until then, voluntary notification to ISU in circumstances where the perceived risks are high enough would seem to be the safest route. Hopefully the government is expecting this and will provide the resource necessary to avoid delays to clearances.