The implications of the National Security and Investment Act 2021 for real estate transactions

Since the National Security and Investment Act 2021 (Act) came into force on 4 January 2022, the Government has had the power to review certain acquisitions and intervene where it considers they may give rise to a national security risk. If a transaction is called in for assessment, the Government can decide whether to clear it, impose conditions, prohibit it or, in some cases, unwind it.

Does the Act apply to property transactions?

The NS&I regime applies where the acquisition of certain types of entities or assets might pose a risk to national security. In broad terms, this means either buying or taking significant influence over a business such as a company (a qualifying entity) or acquiring an asset such as land (a qualifying asset).

Where a transaction involves acquiring control over a qualifying entity, the buyer may have to notify the Government and obtain approval before the transaction can complete. This requirement only applies where certain control thresholds are met and the target entity carries on specified activities in one of 17 prescribed “sensitive” sectors.

By contrast, buying land on its own does not usually require advance mandatory notification. This is because the mandatory prior approval requirement applies only to acquisitions of qualifying entities and not to acquisitions of qualifying assets such as land.

That does not mean the NS&I regime can be ignored for land acquisitions. The Government can investigate, or “call in”, a property transaction after it has been completed if it considers that the transaction may give rise to a national security risk. The practical question is therefore whether there is a realistic risk of Government review. If there is, the parties may want to make a voluntary notification in advance, which means asking the Government to review the transaction before completion (even though notification is not legally required). Obtaining advance clearance can provide greater deal certainty and may be particularly important where the acquisition is funded by secured lending.

When might a property transaction raise national security concerns?

A natural question is what “national security risk” actually means in this context. The Act does not define the term, giving the Government flexibility to look at the particular facts of each transaction and decide whether further review is needed.

When people hear about the NS&I regime, the headlines that often come to mind involve foreign investors acquiring UK companies operating in advanced scientific sectors such as defence and artificial intelligence. However, where the transaction involves land, national security concerns are more likely to arise because of where the property is, what it is used for, or what is located nearby. For example, national security risks may arise where:

• the land is near a sensitive site, such as a military base;
• critical infrastructure runs through or near the land; or
• the property is used for telecommunications, energy or transport purposes.

How can this affect the transaction timetable?

Sellers and buyers are often, understandably, unaware of the scope of the Act as it applies to property transactions and may simply assume that the transaction does not pose any national security risk. Advisers therefore need to ask specific questions as early as possible and include NS&I checks in the due diligence process to determine whether a voluntary notification would be advisable. This should include considering the current and intended use of the land and its proximity to sensitive sites or critical infrastructure.

If it is determined that a voluntary notification should be considered, sufficient time should be built into the exchange and completion timetable to assess the risk and, if advisable, make the voluntary notification. Although the assessment process may be relatively quick in some cases, the voluntary notification needs to include enough information for the Government to consider the transaction properly, which can add time to the process.

One practical way of seeking voluntary clearance might be to exchange contracts with completion conditional on making a voluntary notification to the Government and obtaining the necessary clearance. This is a risk management approach rather than a statutory requirement. There is no prohibition on completion of a qualifying asset taking place before clearance is obtained, provided that the Government has not imposed any interim order preventing completion. However, where land is being acquired with secured lending, a lender may require Government clearance before completion can occur if there is a potential national security risk.

If the Government identifies any national security concerns, it has various powers to impose conditions on the transaction, including, in extreme circumstances, the ability to prohibit the transaction from going ahead or, if it has already completed, unwind the transaction.

Key takeaway

The key takeaway is that the NS&I regime should not be overlooked in real estate transactions. The risk of a pure real estate transaction being called in may be low, but identifying an issue late can affect timing, lender requirements and deal conditionality. Buyers, sellers and their advisers should therefore consider at an early stage whether the land, its location, use or surrounding infrastructure could create a potential national security risk and, where appropriate, build a voluntary notification into the transaction timetable.