New regime for Overseas Entities who own UK land - Key facts and implications for transactions
13 September 2022
13 September 2022
Overseas entities (OEs) which own or acquire land in the UK must disclose details of their registrable beneficial owners on a new public register.
This briefing outlines the key facts and implications for real estate investors and other parties to a land transaction involving an OE and the steps that are required to comply with the new regime.
The Register of Overseas Entities (ROE) launched on 1 August 2022 pursuant to section 3 of the Economic Crime (Transparency and Enforcement) Act 2022 (the Act). Please refer to our previous briefing for an overview of the new regime. In this briefing we will focus on the implementation of the new regime and its impact on real estate transactions. We will look at the rules as they apply in England and Wales, although it should be noted that the regime also applies to land in Scotland and Northern Ireland with some differences relevant to each jurisdiction.
The Economic Crime (Transparency and Enforcement) Act 2022 (Commencement No. 3) Regulations 2022 provided for a staggered implementation of the Act. The ROE launched on 1 August 2022 for OEs to submit applications to Companies House. However, the land registration aspects of the Act (see below) only came into force on 5 September 2022. The delayed implementation provided more time for those involved in ongoing land transactions to register at Companies House and obtain an OE ID before the Land Registry restrictions on disposals and acquisitions took effect.
The key point to appreciate following the launch of the ROE is that as at 1 August 2022 OEs who own a 'qualifying estate' have a transitional period of six months (expiring on 31 January 2023) to register on the ROE and disclose their registrable beneficial owners. In England and Wales this applies to any OE that acquired a 'qualifying estate' pursuant to a land registration application made on or after 1 January 1999. Additionally, from 5 September 2022 OEs who acquire a qualifying interest in land will also need to register on the ROE before they can submit an application to Land Registry to register the acquisition.
Failing to register on the ROE, providing false or misleading information, or failing to comply with a notice requiring registration is a criminal offence which may also result in imprisonment and an unlimited fine.
We understand that Companies House has already sent out 31,000 letters to OEs that currently own a qualifying interest in land in England and Wales advising them of their obligations under the Act. At the time of writing about 300 entities have successfully registered on the ROE. So, there is clearly some way to go.
Companies House has published technical guidance to assist OEs in making an ROE application.
An application for an OE to become registered on the ROE must include the following:
When making an application the OE must:
Broadly the Act defines an RBO as an individual, legal entity or government or public authority which directly or indirectly holds more than 25% of the shares or voting rights in the OE or otherwise exercises significant control over the OE. The definitions and exemptions used in the Act closely follow those which apply to UK companies in respect of people with significant control ("PSC"). As with the PSC regime, it may be necessary to look all the way up the ownership chain to locate any RBOs.
The steps that an OE must take to satisfy the duty to identify any RBOs includes giving an information notice to any person that it knows, or has reasonable cause to believe, is a RBO in relation to it. The information notice will require the recipient to confirm if it is an RBO and provide or confirm the required information in relation to it (and, if any RBO is a trustee, the required information about the trust).
An information notice must require the recipient to comply with the notice within a period of one month. The overseas entity may also deliver an information notice to a third party if it knows or has reasonable cause to believe that person knows the identity of an RBO or the identity of another person likely to have such knowledge.
In complex structures, or where all RBOs are not known or easily ascertainable, the one month time period will need to be borne in mind where registration as an OE is a condition to completion.
It is a criminal offence to fail to comply with an information notice without reasonable excuse or to make a statement in response to an information notice that the relevant person knows to be materially false (or where that person recklessly makes a statement that is materially false).
The Secretary of State may, by written notice exempt a person from the requirement to deliver or respond to any notice sent to it in relation to the ROE Regime and such person will not constitute a RBO for the purposes of the ROE Regime. The Secretary of State may only issue such exemptions in the interests of national security or for the purposes of preventing or detecting serious crime, so these exemptions are likely to be limited in practice.
The application must include prescribed information about the OE and its RBOs. For entities, this includes the name, country of incorporation, registered office, service address, email address, legal form etc. For individuals and managing officers that are natural persons this includes name, date of birth, nationality, residential address, service address etc.
The Act and the implementing regulations make provision for the protection of information provided to Companies House for the purposes of registration. This includes a person's full date of birth and their residential address. However Companies House are not under an obligation to check documents sent to them for such sensitive information (including as part of verification).
Subject to limited exceptions, all documents must be submitted to Companies House in connection with the ROE Regime electronically. Once registered, an OE will be issued with an alphanumeric "overseas entity OD".
Registered OEs have an ongoing duty to update the ROE annually (or confirm there are no changes to its registration). If an OE fails to comply with its duty to update, it will not be considered a registered OE until it has complied with the updating duty.
An OE entity can also make an application for removal from the ROE if it is no longer the registered legal owner of a qualifying estate. The duty to identify RBOs and to deliver the relevant information notices also applies to applications for removal.
Information provided by an OE when applying for registration on the ROE, must be verified before the application is made. The Register of Overseas Entities (Verification and Provision of Information) Regulations 2022 give effect to the verification regime and provides that:
A relevant person will include credit institutions, financial institutions, auditors, insolvency practitioners, external accountants and tax advisers, independent legal professionals and trust or service company providers.
The relevant person must register as an approved verifier with Companies House. They will then be given an assurance code which they can use to complete the verification process.
The verification process itself must be carried out on the basis of documents or information obtained from a reliable source which is independent of the person being verified.
Law Society guidance indicates that law firms may not be best placed to provide the verification service as it works in a very different way to the risk based approach that applies to client due diligence under the money laundering regulations. We are aware of other service providers who are offering a registration and verification service.
Verification must always be completed before an application is submitted to Companies House. If the OE itself submits its application for registration to Companies House then the relevant person is required to deliver the verification statement within 14 days. However registration is likely to be quicker if the relevant person is responsible for submitting the registration application so that the verification statement can be sent at the same time.
It is also worth noting that the Act includes a "general false statement offence" which provides that it is a criminal offence for a person (which would include a relevant person carrying out verification), without reasonable excuse to provide any document or make any statement to Companies House that is misleading, false or deceptive in a material respect.
On 5th September 2022 the Land Registry in England and Wales will be required to enter a restriction (the "OE Restriction") on the title to each qualifying estate acquired by an OE pursuant to a land registration application made on or after 1 January 1999 as soon as reasonably practicable. Irrespective of the date of entry, where the relevant OE was the legal owner of the qualifying estate pursuant to an Land Registry application for registration made prior to 1 August 2022 the OE Restriction will not take effect until the end of the transitional period.
The OE Restriction will provide that no disposition (being a transfer (including the transfer of a charge), lease or charge by way of legal mortgage) of a qualifying estate shall be registered unless:
(together the "OE Disposition Conditions");
Importantly, there are currently no OEs (or classes of them) that are exempt from the regime. The Department for Business, Energy & Industrial Strategy have indicated there is no intention to exercise this exemption at the time of writing.
It is also worth noting that the dispositions by overseas entities which are caught are the transfer of land, the grant of a lease of more than seven years and the creation of a charge over the land. Dispositions not restricted include easements, short-term leases, and leases for a short term granted in reversion.
Land Registry will notify existing OEs when the restriction is entered on their title. In some cases, the restriction will not be entered on the register immediately as any prior pending applications on the day list at Land Registry will have priority.
The contract exemption only applies where the contract is made before the restriction is placed on the title or is entered on the day list. A counterparty to an OE seller may not be prepared to risk relying on this exemption as it could be difficult to predict when the restriction might appear on the title.
Furthermore if there are significant amendments to the contract after exchange then it could be the case that the contract has been varied to such extent that it could not be considered to be "made" prior to the restriction being entered on the register. If a contract is novated it is highly likely that the contract would not be considered as "made" on the date of the original contract, but only on the date of novation.
Therefore, it is more likely that the seller OE will need to have a valid OE ID in order to proceed with the transaction.
As already mentioned the OE restriction only takes effect after 31st January 2023 for existing OE sellers. However, buyers should note that it is the date of the Land Registry application for registration of the transaction that determines whether the transaction is caught by the OE restriction.
Buyers purchasing from an OE seller can proceed without requiring the OE seller to have an OE ID provided the Land Registry application is submitted before 31 January 2023. However, even for transactions that complete before 31 January 2023, if the Land Registry application is submitted after this date then the restriction will be effective and Land Registry will require an OE ID to confirm that the OE seller was a registered OE at the time of completion of the transaction or that one of the other OE Disposition Conditions apply.
Of course, as we have seen for other breaches of the Act it is a criminal offence for an OE (and every officer of that entity) to make a prohibited registrable disposition. Even if the OE subsequently registers on the ROE or updates its registration, this will not remedy the situation. This is because the OE must have a valid OE ID (or be able to rely on one of the other OE Disposition Conditions) at the time of the disposition.
The Secretary of State may consent to the registration of a disposition that would otherwise be prohibited by the OE Restriction or otherwise by operation of the ROE Regime if satisfied that (a) that at the time of the disposition the person to whom [the disposition] was made did not know, and could not reasonably have been expected to know, of the prohibition; and (b) that in all the circumstances it would be unjust for the disposition not to be registered. These circumstances are likely to be limited.
From and including 5 September 2022 OEs must be registered on the ROE and have obtained an OE ID before they can make a Land Registry application to register the acquisition of a qualifying estate.
Land Registry will cancel applications by OEs which do not have an Overseas Entity ID. This applies to all Land Registry applications received after 5th September 2022 even if the transaction completed before 5th September 2022. Applications by OEs received between 1 August and 4 September 2022 do not require an OE ID but should Land Registry have cause to cancel that application then the OE buyer will not be able to resubmit the application after 5th September without an OE ID.
An OE registered as the registered proprietor of a qualifying estate pursuant to a land registry application submitted on or after 1 August 2022 will be subject to an OE restriction. The key difference for OEs that become registered proprietors of a qualifying estate pursuant to a land registry application on or after 1 August 2022 is that they do not benefit from the transitional provisions under the Act. The OE restriction has immediate effect.
In addition OEs who are entitled to be registered as the proprietor of a qualifying estate (and become entitled to be registered on or after 5 September 2022) but who are not yet registered must not make a disposition (transfer, charge, grant of lease over 7 years) unless the OE has a valid OE ID or one of the other OE Disposition Conditions apply.
This situation routinely occurs on a real estate acquisition with finance. Essentially an OE acquires a qualifying land interest and immediately enters into a legal charge before, or without becoming, registered as proprietor of the title. Therefore lenders will no doubt require that the OE is registered on the ROE before the OE completes the real estate acquisition. This ensures that the charge is registrable as a legal charge and it also avoids the OE Overseas Entity committing a criminal offence which could have regulatory and reputational implications for lenders.
When applying to be registered on the ROE at Companies House, the application must include details of any disposals of land on or after 28 February 2022 (including title numbers; dates of relevant transactions).
Even if the requirement to register does not apply (e.g. because at 31 January 2023, the OE no longer owns any land in the UK), there is nevertheless still a requirement to notify Companies House of disposals on or after 28 February 2022, including details of any RBOs at the time of the disposition, before the end of the transitional period.
Failure to do so is a criminal offence. Again, the officers of the overseas entity can be liable.
OEs planning to acquire a qualifying interest should submit their application to Companies House as soon as possible to ensure they have the required OE ID in order to submit the Land Registry application to register the acquisition of a qualifying estate.
Real estate investment structures should be checked to identify any existing OEs who hold a qualifying estate and once identified the relevant OE should submit an application to Companies House for registration on the OE. It makes sense to do this well before the transitional period expires on 31st January 2023 to alleviate any possible delays arising in future transactions.
OEs that have made a disposition of a qualifying estate since 28 February 2022 should ensure that they provide all required information to the ROE on or before 31 January 2023, even if they no longer have any interest in the qualifying estate.
As a charge by way of legal mortgage does not constitute a qualifying estate, an overseas lender (or security trustee or agent) is not required to register as an OE simply by virtue of the grant of that charge.
For any transaction that involves an OE, searches should be carried out at the ROE and the Land Registry to check that the OE is registered on the ROE and is compliant with its updating duty . Registration on the ROE may need to be factored into the transaction timetable and should be actioned early in the transaction where applicable. This is particularly important as information notices will need to be sent to the RBOs before an application can be submitted to Companies House for registration on the ROE.
All parties in transactions involving OEs need to consider the impact of the new rules and include appropriate drafting in their transaction documents.
For contracts, where either party is an OE, it may be necessary to include provisions for:
Lenders seeking to enforce security will be able to rely on the fact that 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. Accordingly, lenders should not find themselves unable to enforce a charge by way of legal mortgage granted in their favour as a result of a failure by their borrowers to comply with the ROE Regime, but should be aware that enforcement may be complicated (or made more costly and/or time consuming) by any failure by a borrower/security provider that is an OE to comply with the regime. Please refer to this briefing for more information on how the ROE regime affects real estate finance transactions.
Register Commencement Date: means 1 August 2022.
Land Registry Commencement Date: means 5 September 2022.
Overseas Entity: a legal entity (see below) that is governed by the law of a country or territory other than the United Kingdom (even if the entity is UK tax resident).
Legal Entity: means a body corporate, partnership or other entity that (in each case) is a legal person under the law by which it is governed.
Registrable Beneficial Owner ( RBO): means (a) an individual (nationality and residence are irrelevant); (b) a legal entity; or (c) a government or public authority.:
- An individual is a RBO in relation to an overseas entity if the individual is a beneficial owner of the overseas entity and it is not exempt from being registered (see below).
- A legal entity (other than a government or public authority) is an RBO in relation to an overseas entity if (a) the legal entity is a beneficial owner of the overseas entity; (b) it is subject to its own disclosure requirements (see below); and (c) it is not exempt from being registered (see below).
- A government or public authority is an RBO in relation to an overseas entity in all cases where it is a beneficial owner of that overseas entity.
"Beneficial Owner": a person (which could be an individual, legal entity or government or public authority) ("X") is the "beneficial owner" of an overseas entity or other legal entity ("Y") if one or more of the following conditions are met:
- X holds, directly or indirectly, more than 25 per cent of the shares in Y;
- X holds, directly or indirectly, more than 25 per cent of the voting rights in Y;
- X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of Y;
- X holds the right to exercise, or actually exercises, significant influence or control over Y; or
- X holds the right to exercise, or actually exercises, significant influence or control over the activities of a trust or an entity that is not a legal person under its applicable law but meets one or more of the above conditions in relation to Y.
"Exempt from being registered": a person (whether a legal entity or an individual) will be exempt from being registered if it satisfies all of the following conditions:
- the person does not hold any interest in the overseas entity other than through one or more legal entities;
- the person is a beneficial owner of every legal entity through which the person holds such an interest;
- the legal entity through which that person holds such an interest is subject to its own disclosure requirements (or, if the interest is held through a chain of legal entities, at least one of those legal entities is subject to its own disclosure requirements).
"Subject to its own disclosure requirements": an entity will be "subject to its own disclosure requirements" if (broadly speaking) the PSC Regime applies to it, it is listed on a relevant market or it is already registered on the register of overseas entities as an OE. In addition, an entity will be "subject to its own disclosure requirements" if it is an overseas legal entity that provides trust services (i.e. is acting as a trustee of a trust or similar legal arrangement) and the provision of trust services is regulated in that country or territory by a supervisory authority.
Qualifying Estate: means (in relation to land in England and Wales): (a) a freehold estate in land; or (b) a leasehold estate in land granted for a term of more than seven years from the date of grant.
Prescribed statements on beneficial ownership:
(b) that the entity is able to provide the required information about each registrable beneficial owner it has identified
1. The required information about the entity.
2. The required information about each registrable beneficial owner that the entity has identified.
|2||A statement that the entity has no reasonable cause to believe that it has any registrable beneficial owners.|
1. The required information about the entity.
2. The required information about each managing officer of the entity.
(a) that the entity has reasonable cause to believe that there is at least one registrable beneficial owner that it has not identified;
(b) that the entity is not able to provide the required information about one or more of the registrable beneficial owners it has identified; or
(c) that paragraphs (a) and (b) both apply.
1. The required information about the entity.
2. The required information about each managing officer of the entity.
3. The required information about each registrable beneficial owner that the entity has identified or so much of that information as it has been able to obtain.
Author: Alison Murrin, Expertise Counsel