The Register of Overseas Entities - Impact on Real Estate Finance transactions

The UK Register of Overseas Entities, maintained by Companies House, was brought into force by the Economic Crime (Transparency and Enforcement) Act 2022 ("ECTEA"). ECTEA was fast-tracked through Parliament as part of the UK Government's urgent response to Russia's invasion of Ukraine and includes three main measures:

• the introduction of the Register of Overseas Entities for owners of real estate in the UK;
• an amendment to the Proceeds of Crime Act 2002 to strengthen the existing unexplained wealth order regime; and
• certain amendments to the existing legislation on UK sanctions.

Modelled on the existing People with Significant Control (PSC) regime applicable to most UK entities since 2016, the Register of Overseas Entities will be conceptually familiar territory for most real estate lenders active in the UK. However, the speed at which the Register of Overseas Entities came into being - ECTEA received Royal Asset on 15 March 2022 and the Register of Overseas Entities opened on 1 August 2022 - has left many market participants unprepared.

This note focuses on the property aspects of ECTEA and considers the background and key features of the new register, the impact of ECTEA on the registration of dispositions of land in the UK and offers guidance to real estate lenders embarking on the exercise of assessing the impact of the new regime on existing loan books and new lending.

Background to the Register of Overseas Entities

There has long been concern about the lack of transparency around the ultimate owners of land in the UK held using corporate vehicles and the potential for UK land to be used as a means to launder or conceal the proceeds of crime. While UK companies are subject to the PSC regime, no similar regime applied to overseas companies operating in the UK and accordingly, information about who owns and controls UK land was limited. The UK Government hopes that the regime established by ECTEA, including the new register, will improve transparency in the real estate sector and act as a deterrent to those seeking to use UK land as a means to conceal illicit funds.

The property aspects of ECTEA, including the Register of Overseas Entities, apply to all nations in the UK although implementation differs slightly across jurisdictions based on the rules and practice of the three UK Land Registries. This note considers the impact of ECTEA and the Register of Overseas Entities on transactions involving property in England and Wales only.

What is the Register of Overseas Entities and who is required to register?

The Register of Overseas Entities is a new statutory register maintained by Companies House. The register is publicly accessible via the Companies House website.

Broadly speaking, an overseas entity (including any body corporate, partnership or other entity that is a legal person governed by the law of a country or territory outside of the UK) that wishes to become registered as the legal owner of freehold or leasehold property in the UK must register on the Register of Overseas Entities and disclose its registrable beneficial owners or managing officers. A "registrable beneficial owner" may be an individual, another legal entity or a government or public authority, provided certain control thresholds are met.

The information submitted as part of any application to become registered must be verified by a UK-supervised professional, such as a solicitor, auditor, external accountant or tax adviser or company service provider.

ECTEA provides that certain persons may, in the future, be exempt from the requirement to register or exempt from constituting a registrable beneficial owner. No such general exemptions are currently in force.

Finally, it should be noted that an overseas lender (or security trustee or agent) is not required to register on the Register of Overseas Entities simply by virtue of the grant of a charge in respect of UK real estate in its favour.

What is the deadline for registration?

The Register of Overseas Entities opened on 1 August 2022. Overseas entities that already own or lease property in England and Wales, acquired after 1 January 1999 (different dates apply in Scotland and Northern Ireland) must register by the end of a transitional period expiring on 31 January 2023. The requirement to register also applies to overseas entities that disposed of their interest in land on or after 28 February 2022, even if the relevant entity owns no other land in the UK as a result of that transfer.

For overseas entities seeking to become registered as owners of UK real estate after 5 September 2022, the application to the Land Registry must be accompanied by evidence that the entity is registered on the Register of Overseas Entities and is in compliance with its duty to update the register (described below).

Once registered, an overseas entity will be issued with an alphanumeric "overseas entity ID". An overseas entity must thereafter update the register annually (or confirm that the existing registration remains accurate). The overseas entity may also elect to make updates to the register voluntarily. If an overseas entity later ceases to own any property in the UK, it may apply to be removed from the register.¹

What happens if an overseas entity that owns UK property does not register?

Failure to register or update the register where an overseas entity is required to do so (or the submission of false information in relation to any registration or update) is a criminal offence committed by the relevant overseas entity and by every officer of the entity who is in default, punishable by a fine or imprisonment.

To reinforce the regime, where an overseas entity has failed to register or comply with its updating duty, the relevant entity will be unable to:

• register any acquisition of freehold or leasehold property; or
• sell, lease or charge the freehold or leasehold property owned by it.

These practical limitations on the ability of an overseas entity to deal with its property are achieved by the Land Registry applying a restriction on the title of each registered freehold or leasehold property owned by an overseas entity. The restriction will provide that no disposition (being, for these purposes, a transfer (including the transfer of a charge), lease or charge by way of legal mortgage) shall be registered unless:

• the disposing entity is a registered overseas entity that has complied with its updating duty (unless exempt);
• the disposition is made in pursuance of a statutory obligation or court order, or occurs by operation of law;
• the disposition is made in pursuance of a contract made before the restriction is entered in the register;
• 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 Secretary of State gives consent (these circumstances are likely to be limited); or
• the disposition is made by a specified insolvency practitioner in specified circumstances.²

How can lenders compel existing borrowers to register? Will failure to comply constitute an Event of Default under my facility agreement?

Given the consequences of failure to register (as outlined above), we expect most legitimate owners of real estate to register voluntarily without lenders needing to take steps to compel them to register.

Facility agreements that were drafted prior to contemplation of the new regime will not specifically refer to it. As it is a legal obligation for overseas entities holding UK real estate to make an application to register by the end of the transitional period, failure to do so may result in the borrower being in breach of the "Compliance with laws" and/or "Authorisations" undertakings, and result in a misrepresentation under the "Non-conflict with other obligations" provisions included in most LMA-based facility agreements (after the expiry of any relevant grace period). Whether this is the case will depend on any qualifications or caveats included in the drafting of these provisions.

How long does registration take?

While Companies House are currently processing applications for registration within 2 working days, the requirement to register and the process that must be followed has the potential to delay transactions where the relevant parties have not taken steps to register in good time. At the time of writing only 275 overseas entities had successfully registered - out of an estimated 31,500 that are required to do so – so it is possible that the turnaround time for applications may be extended in the future.

Where an overseas entity identifies a registrable beneficial owner it is required to notify that person by way of an "information notice". The information notice will require the recipient to confirm if it is a registrable beneficial owner and provide or confirm the required information in relation to it (and, if any registrable beneficial owner 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.

In complex structures, or where all registrable beneficial owners are not known or easily ascertainable, the one month time period will need to be borne in mind where registration on the Register of Overseas Entities is a condition to completion/closing (as it will be in many real estate finance transactions) as the application for registration will not be able to proceed until that time period has expired.

Should lenders be concerned that non-compliance with the new regime could affect their ability to enforce their security?

If an overseas entity that owns UK real estate has failed to register (or comply with its annual updating duty), it will not be able to register a disposition of its property unless one of the exceptions in the restriction applies. The most relevant of those exceptions in the context of an enforcement by a secured lender are:

• a disposition being 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; or
• a disposition being made by a specified insolvency practitioner in specified circumstances.

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 requirements of ECTEA as regards the Register of Overseas Entities. Lenders should, however, 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 overseas entity to comply with the regime, as the Land Registry and any purchaser will need to be satisfied that the relevant conditions are met.

As the new regime applies only to dispositions affecting real estate directly, the enforcement of share security (or equivalent) will be unaffected.

Next steps: existing loan books

Lenders with existing exposure to UK real estate should take the following steps:

• identify transactions where UK real estate is held by an overseas entity – these are "in-scope transactions";
• contact borrowers in respect of in-scope transactions to ensure that any relevant overseas entities are prepared to make an application to register before the end of the transitional period;
• request confirmation of the relevant "overseas entity IDs" once available;
• implement active monitoring of initial registration and ongoing compliance in respect of in-scope transactions (including seeking confirmations of compliance as part of quarterly reporting);
• consider making evidence of registration a condition to any consents or waivers requested during the transitional period or in respect of any further drawdowns for permitted acquisitions; and
• consider amending existing documentation as part of any consents, waivers or amendments requested in the future (to incorporate the changes identified below in respect of new lending).

Next steps: new lending

Lenders should consider the following in respect of new lending involving in-scope transactions:

• take steps to identify whether any relevant overseas entities (including vendors) are registered and in compliance with their updating duty and if not, which party will be responsible for procuring registration or updating. This is particularly relevant for acquisition finance;
• documentation should be updated to include (at a minimum) an undertaking to register on the Register of Overseas Entities and to maintain that registration and comply with the annual updating duty. Failure to so comply should constitute an Event of Default;
• information undertakings and forms of compliance certificate contained in documentation should include confirmations of registration and compliance with the updating duty to assist ongoing monitoring;
• funding conditions precedent should include evidence of registration on the Register of Overseas Entities and, where applicable, a shortening of the annual update period. This is advisable where an overseas entity's annual update is likely to fall due prior to the application for registration of any security having been made; and
• legal opinions delivered in connection with in-scope transactions should confirm that a search of the register has been made as at the date of the opinion.

Author: Stuart Blacklock, Senior Associate

^{1. The provisions of ECTEA relating to the updating duty (section 7) and the ability to apply for removal from the register (section 9) are not yet in force.} 

^{2. "Specified insolvency practitioner" and "specified circumstances" are to be defined in implementing regulations. At the time of writing those regulations have yet to be made, so the precise scope of this exception is unclear.}

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