The new UK register of overseas entities – the impact on property transactions
The Economic Crime (Transparency and Enforcement) Act 2022 (the Act) was fast-tracked through Parliament, receiving Royal Assent on 15 March 2022. The Act establishes a new register of beneficial ownership of overseas entities (the ROE) and will have significant implications for property transactions where any party is an overseas entity.
The ROE will be a public register showing the ultimate beneficial) owners of overseas entities holding UK property to ensure that companies, or other structures cannot be used to disguise ownership. The number of landowners affected is significant: it has been estimated there are approximately 95,000 properties in England and Wales owned by 32,000 overseas entities.
The provisions relating to the ROE at Companies House are due to come into force on 1 August 2022 (although the commencement order has not yet been made). The provisions relating to land registration have been delayed until 5 September 2022. The Act applies to both commercial and residential property in the whole of the UK (this briefing only covers property in England and Wales).
Which overseas entities will be affected?
“Overseas entities” (OE’s) are defined as legal entities governed by the law of a country or territory outside the UK. The term “legal entity” is defined, as a body corporate, partnership or other entity that (in each case) is a legal person under the law by which it is governed. The Act does not apply to individuals that own property in their own name (although individuals acting as trustees may be subject to registration requirements for HMRC’s Trust Registration Service).
The Act will affect:
- Overseas entities that already own property.
- Overseas entities that have made a recent disposal of property; and
- Overseas entities acquiring property (and applying for registration at the Land Registry on or after 5 September 2022).
It is worth noting that the Act refers to ‘exempt overseas entities’, meaning those of such description as may be specified in regulations made by the Secretary of State. However, no such regulations have yet been made and we understand that there are no immediate plans to exercise this power. This means that there will be no exempt overseas entities when the ROE comes into force.
OE’s already registered at the Land Registry as the proprietor of a “qualifying estate” (a freehold or a lease granted for a term of more than 7 years) must apply to Companies House to join the ROE by 1 February 2023 (the 6 month transitional period expires on 31 January 2023). OE’s that became the registered proprietors at the Land Registry pursuant to a Land Registry application made before 1 January 1999 are excluded from this requirement.
Failure to comply with this registration obligation is a criminal offence, potentially subjecting the OE and its officers to a fine or imprisonment.
Once the relevant parts of the Act are in force, the Land Registry will be obliged (before 1 February 2023) to enter a restriction on existing OE’s registered titles (save where the OE became the registered proprietor pursuant to a Land Registry application made before 1 January 1999). This restriction (the OE Restriction) will prevent the OE from entering into a transfer, the grant of a lease for a term of more than 7 years or granting a legal charge over the property, unless it has obtained an overseas identity number from Companies House (OE ID) or one of the limited statutory exceptions applies (as detailed below – see Overseas entity buyers). For existing landowners, this restriction will not take effect until 1 February 2023 and will be worded accordingly.
OE’s that own UK property must also annually update the information they have submitted to Companies House and failure to comply with this updating duty is also a criminal offence.
The Act can apply even where an OE sells, grants a lease of more than 7 years or charges the property before 1 August 2022.
An OE will be obliged to notify Companies House of any disposals that it has made between 28 February 2022 and 31 January 2023 (inclusive). The OE does not have to join the ROE in this scenario, but it does have to provide specified information about its beneficial owner(s) to Companies House. The information required is largely the same as that required to register on the ROE and must be provided before 1 February 2023.
This obligation to notify will not apply if the OE has an OE ID before 1 February 2023 e.g., where the OE also owns other UK property.
Overseas entity sellers
OE’s that already own property will have a transitional period within which to comply with the Act. This means that OE’s will be able to sell their property during this period without registering on the ROE at Companies House. The OE Restriction entered on the Land Registry title (referred to above) will not take effect until 1 February 2023.
However, sellers that do not own any other property need to be mindful of the position at the end of the transitional period. If, for any reason, the OE seller is still named as the registered proprietor at the Land Registry on 1 February 2023 then it will become subject to the requirement to register on the ROE (notwithstanding that it has already completed the sale of the property). Failure to comply is a criminal offence and this situation could arise if there are delays in completing the Land Registry application to register the new owner. The same point applies in relation to the annual updating duty – an OE will be obliged to update if it remains named as the registered proprietor at the Land Registry at the relevant time (failure to update is also a criminal offence).
The OE Restriction will take effect from 1 February 2023; it will then be a criminal offence for the OE to transfer the property, grant a lease for a term of more than 7 years or enter into a legal charge (as the chargor) unless it has obtained an OE ID or one of the statutory exceptions applies to the transaction. Any such breach of the OE Restriction does not affect the validity of the transaction itself, but buyers will want to avoid being party to anything that results in the seller committing an offence. Buyers should also be aware that they will not acquire legal title to the property until the transfer has been registered at the Land Registry and this will not occur unless the Land Registry is satisfied that the OE Restriction has been complied with. It is therefore essential that buyers carry out appropriate due diligence whenever purchasing from an OE and include suitable contractual provisions.
Overseas entity buyers
OE’s that acquire a qualifying estate will be required to have an OE ID before they apply to the Land Registry to become the registered proprietor of the property (and in the case of a legal charge the OE will need to have the OE ID before executing the charge). This requirement will apply immediately upon commencement of the relevant part of the Act, which we understand will be 5 September 2022, and the Land Registry will reject any applications where the buyer does not comply. The buyer must have the necessary OE ID at the time of submitting their application as this is not something that can be corrected later. This will apply to both registered land and to any applications for first registration.
Initially, the ROE and the new land registration requirements were to come into force on the same date. Following concerns about potential delays at Companies House (given the number of overseas entities that may need to register), the implementation dates have now been staggered so as to give buyers time to apply for an OE ID in advance of 5 September 2022. However, we cannot be certain that even this short extension will provide enough time; this is all dependant on how many OE’s apply at once and how swiftly the new Companies House online registration system will operate. Buyers need to ensure that they have the required OE ID so that they can apply to the Land Registry promptly and within their priority period after completion of any transfer, lease or charge. Sellers will also be concerned to ensure that buyers have the necessary OE ID at the relevant time. This is because the seller will potentially retain liability as the legal owner of the property until such time as the buyer has been registered as the proprietor at the Land Registry.
An OE looking to acquire a freehold or leasehold property (lease of over 7 years) in the coming months, should be preparing to submit a ROE registration application as soon as full details around the Companies House registration requirements and verification process of the prescribed information are known. This includes analysing their ownership structure and gathering the information they will need to submit to Companies House.
The provisions outlined above set out the requirement to have an OE ID at the time a buyer submits their Land Registry application to be registered as proprietor. The obligations will also apply whenever the OE transfers, grants a lease for more than seven years or grants a legal charge after acquiring the property but before it has been registered as the proprietor at the Land Registry. For example, this could be relevant to charges, as explained below, and to certain sub-sale arrangements or swift onwards sales. This means an OE cannot avoid these obligations by sub selling or flipping the property.
When completing the application to register the transfer, the Land Registry will enter an OE Restriction on the title and this will take effect immediately; there is no transitional period for new owners. Although there will be certain statutory exceptions: for example, any such transactions made in pursuant of a statutory obligation or court order, in the exercise of a lender’s power of sale or made by a specified insolvency practitioner will not be caught. There is also an exception for transfers, leases or charges made in pursuance of a contract made before the OE Restriction is entered on the registered title at the Land Registry.
Overseas entity borrowers
The Act will only apply where the OE is the chargor (i.e., the borrower); OE’s that are proprietors of registered charges (i.e. lenders) will not be caught.
Where an OE buyer is obtaining finance to fund the purchase price, the OE must have an OE ID before completing the charge. Buyers and lenders must be made aware of this requirements because it cannot be satisfied by obtaining the OE ID at a later date. Lenders will want to ensure that an OE borrower provides the OE ID as a precondition to drawdown.
Lenders may be concerned about the position in relation to existing charges that are already registered against titles held by OE’s. However, both existing and future lenders are protected; the OE Restriction will not apply to any disposition made in the exercise of a power of sale or leasing conferred on the proprietor of a registered charge or a receiver appointed by such a proprietor.
The Act will apply to the grant or assignment of any lease that was originally granted for a term of more than 7 years. The issues discussed in this article relating to buyers and sellers will also apply to landlords and tenants.
Although the Act will not apply to leases granted for a term of 7 years or less, parties may still wish to consider some of the wider consequences of a failure to comply with the Act. For example, if the landlord is an OE that has failed to comply with the initial obligation to register on the ROE or the annual updating duty then it will be committing a criminal offence. The Act will not prevent such a landlord from entering into short leases, but the tenant may be concerned about entering into the transaction due to reputational and regulatory concerns. It is advisable to check the position at Companies House whenever dealing with an OE in connection with property.
The provisions of the Act will need to be carefully considered in relation to all property transactions that involve OE’s in future and some past transactions will also be affected. Parties will need to evaluate their position where contracts have already been exchanged and completion will take place after the relevant provisions of the Act are in force. The parties will be legally obliged to complete but, in some situations, it may be advisable to consider variations to the contract to deal with any potential land registration issues.
OE’s do not have to hold an existing interest in UK property in order to apply to Companies House to register on the ROE. Any OE that has plans to acquire UK property after 1 August 2022 should be collating the requisite information and should consider applying to Companies House at an early stage, as we are unable to advise on the timing of the Companies House registration process nor whether there maybe significant delays in obtaining the OE ID.
This article focuses solely on implications for property transactions but you can also read more about the Act in our article addressing the implications for trust structures holding UK Real Estate.
If you need any guidance around the implications of the Act for your transactions, please get in touch with your usual Charles Russel Speechlys contact.