The new Register of Overseas Entities

Part 1 of the Economic Crime (Transparency and Enforcement) Act 2022 (the Act) will, once the Act is in force, create a register of overseas entities that own real estate in the UK (the Register).

• The Government put forward proposals for such a register some years ago, but progress has been accelerated by the outbreak of war in Ukraine.
• The primary objective is to crack down on money laundering that involves UK property by making it harder to hide behind shell companies and easier to seize properties that have been bought with dirty money.
• Any overseas entity that owns or intends to buy UK property now has to take reasonable steps to identify its “registrable beneficial owners” and submit details to Companies House to put on the Register.
• New land registration requirements will be introduced that will see restrictions being placed on titles owned by overseas companies. These will stop transactions being registered where an overseas entity is in breach of the new rules.
• The rules have retrospective effect, applying to any overseas entity that has acquired property in England and Wales since 1999 (or since 2014 in Scotland).
• There will be a six-month transition period, by the end of which overseas entities that are the registered proprietors of freehold or leasehold properties will need to have been entered on the Register or be subject to a pending application.
• Responding to concerns about asset flight during the transition period, the House of Lords made a late change obliging foreign owners to disclose beneficial ownership where they have sold a UK property at any point between 28 February 2022 and the end of the transition period.
• The Register will, for the most part, be public. Registered entities will receive an overseas entity ID from Companies House, akin to a UK company’s registered number, and registered entities will be obliged to ensure annually that the information on the Register is up to date.
• Failure to comply can lead to criminal and financial penalties.
• Existing charges can be enforced, meaning that lenders are protected in that respect. The Government appears aware of lenders’ concerns generally, but we will need to wait to see the crucial secondary legislation to understand how these have been addressed. Secondary legislation will also address issues such as verification of information submitted to Companies House and which overseas entities will be exempted by the legislation.

The Act changes the law in a number of other respects. Part 2 relates to unexplained wealth orders and Part 3 relates to sanctions, but these are outside the scope of this article.

For our initial thoughts on the Register, please listen to this podcast, which we recorded on the day after the Economic Crime (Transparency and Enforcement) Bill 2022 was introduced into parliament.

The Government has also published a White Paper with proposals to reform Companies House and increase the transparency of UK corporate entities. You can read about this in our Insights article here.

We set out below some of the key details and obligations contained in the Act

Who must register?

Overseas entities that own land in the UK.

The term “overseas entity” has been given a wide definition in the Act and means a legal entity that is governed by the law of a country or territory outside the UK.

A “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.

A “registered” overseas entity is an overseas entity the name of which appears on the Register.

What must overseas entities do?

Overseas entities must take reasonable steps to identify their “registrable beneficial owners” and obtain the categories of information about them that are specified in the Act. For example, where a registrable beneficial owner is an individual, the required information will include the name, date of birth and nationality of that individual and their usual residential address. Not all information will be made publicly available.

The Act provides for overseas entities to serve an "information notice" on any person that it knows, or has reasonable cause to believe, is a registrable beneficial owner in relation to the entity or any person who they believe will enable them to identify a beneficial owner.

The Act allows for a period of one month for a person to respond to an information notice. It is an offence for a person, without reasonable excuse, to fail to comply with such a notice, to make a statement knowing it to be false in a material particular, or recklessly to make a statement that is false in a material particular. A person found guilty of such an offence will be liable to imprisonment for a maximum term of two years or to a fine (or both).

In certain circumstances, if, for example, an overseas entity cannot provide complete information about its registrable beneficial owners, information about its managing officers will be required instead.

Who is a registrable beneficial owner?

A “beneficial owner” can be an individual, a legal entity or a government or public authority. The Act provides that a person (X) is a “beneficial owner” of an overseas entity or other legal entity (Y) if one or more of the following conditions are met:

• Condition 1 is that X holds, directly or indirectly, more than 25% of the shares in Y.
• Condition 2 is that X holds, directly or indirectly, more than 25% of the voting rights in Y.
• Condition 3 is that X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of Y.
• Condition 4 is that X has the right to exercise, or actually exercises, significant influence or control over Y.
• Condition 5 is that (a) the trustees of a trust, or the members of a partnership, unincorporated association or other entity, that is not a legal person under the law by which it is governed meet any of the conditions specified above (in their capacity as such) in relation to Y, and (b) X has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or entity.

Once beneficial owners have been identified, the Act only requires those that are “registrable” to appear on the Register. It is possible for a person to be a beneficial owner but not to be registrable. To determine whether an individual, legal entity, government or public authority is a registrable beneficial owner, the relevant tests in Schedule 2 of the Act will need to be applied.

Where will the information be held?

Companies House will maintain the Register. The Register will be public (although not all information will be available for inspection). Once registered, overseas entities will receive an “overseas entity ID” from the Registrar of Companies.

How often will the information need to be updated?

The information will need to be updated annually.

An overseas entity will have 14 days within which to deliver the updated information. The first period of 12 months will commence on the date of registration of the overseas entity and the updating duty will apply every 12 months thereafter. An overseas entity may choose to update before the end of the update period and an early update appears to have the effect of resetting the clock in respect of when the next update is due.

Both the overseas entity and its officers will commit an offence if they fail to keep the information updated.

How will a failure to comply affect property ownership in England and Wales?

The Act contains provisions which will amend the Land Registration Act 2002 (LRA 2002). The amendments will give rise to a significant change in practice for overseas entities that own registered land in England and Wales and for third parties that deal with them.

Conducting searches of the Register will become standard practice in transactions involving overseas entities. In relation to England and Wales, the Act provides that:

• No application may be made to register an overseas entity as the proprietor of a "qualifying estate" (namely, a freehold estate or a leasehold estate granted for a term of more than seven years) unless, at the time of the application, the entity is a registered overseas entity or an exempt overseas entity. In effect, an overseas entity will be unable to obtain legal title to registered land unless it has complied with the new regime.

• Where an overseas entity already owns or becomes a registered proprietor of a qualifying estate, the registrar will be required to enter a restriction on the registered title of the qualifying estate preventing the registration of any disposition by an overseas entity unless:

  (a) the entity is a registered overseas entity, or is an exempt overseas entity, at the time of the disposition,
  (b) the disposition is made in pursuance of a statutory obligation or court order, or occurs by operation of law,
  (c) the disposition is made in pursuance of a contract made before the restriction is entered in the register,
  (d) the disposition is 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,
  (e) the Secretary of State gives consent under paragraph 5 to the registration of the disposition, or
  (f) the disposition is made by a specified insolvency practitioner in specified circumstances.

The restriction will be entered on existing titles where the overseas entity became the registered proprietor pursuant to an application made on or after 01 January 1999. The Act states this restriction will not take effect until the end of the transition period.

Dispositions to which the Act applies are the transfer of land, the grant of a lease of more than seven years and the creation of a charge on the land.

A “registered overseas entity” is defined for the purposes of the LRA 2002 as an overseas entity that is registered in the register of overseas entities. However, the provisions also state that, for the purposes of the LRA 2002, an overseas entity that fails to comply with its updating duty is not to be treated as being a “registered overseas entity” until it remedies the failure. The provisions contained in the Act also cannot be avoided by a non-compliant overseas entity failing to register a transaction and then seeking to make a further disposition without being registered.

It will be an offence for an overseas entity and its officers to make any disposition of a qualifying estate that cannot be registered. A person found guilty of such an offence will be liable to imprisonment for a maximum term of five years or to a fine (or both).

If a disposition cannot be registered because it is not possible to comply with the restriction, the Act contains a provision allowing the Secretary of State, in limited circumstances, to consent to the transaction being registered.

How will the Register affect lenders and creditors?

The creation of the Register will affect lenders in a number of ways.

The first is when finance is provided. It will be essential for lenders to check that borrowers that are overseas entities are registered on the Register and have complied with their updating obligations. Evidence of this is likely to become a condition precedent in facility agreements. Ongoing compliance will also need to be addressed.

The creation of the Register will also potentially impact lenders on enforcement. One of the penalties for non-compliance is that the Land Registry will refuse to register a disposition made by a non-compliant overseas entity. The penalty is created by the insertion into the LRA 2002 of a new Schedule 4A.

The creation of this sanction carries with it a risk that a lender may effectively be infected by the default of its borrower and may be unable to enforce its remedies as a mortgagee by selling to a third-party purchaser. This is a matter of concern to lenders. As a result, the Act will create a safe harbour for lenders.

The new Schedule 4A creates an exception to the general rule that the Land Registry will not register a disposition made by a non-compliant overseas entity. The exception will apply when “the disposition is 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 restriction on registration introduced by the new Schedule 4A will also affect the rights of creditors on the insolvency of an overseas entity. For this reason, the new Schedule 4A will permit registration when “the disposition is made by a specified insolvency practitioner in specified circumstances”.

It is anticipated that this would enable a sale by an administrator or by an overseas insolvency officer whose powers are recognised by the English courts. However, the terms “specified insolvency practitioner” and “specified circumstances” are not defined in the Act and will be defined in secondary legislation, which has yet to be published.

Are there any transitional provisions?

There is a transitional period of six months beginning on the day on which section 3 of the Act, which requires Companies House to maintain the Register, comes into force. An overseas entity that is a registered freehold or leasehold proprietor and acquired the property since 01 January 1999 will, by the end of the transitional period, need to either be on the Register or have a pending application for registration in order to avoid committing a criminal offence.

In addition, an overseas entity that has disposed of property on or after 28 February 2022 must, if it is not exempt, provide the required information about the disposition and its beneficial ownership to Companies House by the end of the transitional period at the latest. Failure to do so is a criminal offence. Again, the officers of the entity can be liable. Where an overseas entity is also applying to go on the Register as it continues to own UK property it should disclose any dispositions between 28 February and the making of the application, in its application form.