What is happening?
Beneficial owners of non-UK companies that own UK property are to be included on a publicly accessible Register of Overseas Entities (the ROE) under provisions included in the Economic Crime (Transparency and Enforcement) Act (the Act). A non-UK company that fails to register will be unable to sell, charge or lease the land. The register came into effect on 1 August 2022 and the land registration elements came into effect on 5 September 2022.
A six month transitional period will run from 1 August 2022 to enable:
- existing overseas entities registered proprietors to register at Companies House and
- those overseas entities who are under contract to purchase UK land to complete without the need to register for an overseas entity identification number prior to completion.
The register of overseas entities that own UK property
To increase transparency and reduce the application of illicit funds, overseas entities must register with Companies House (detailing their beneficial ownership) before they can be registered as the legal owner of UK property. The ROE is largely open access, so the public can inspect records freely.
What is an "overseas entity"?
Non-UK incorporated LLPs and companies (regardless of any UK tax residency), foreign foundations and non-UK partnerships that have, or elect to have, legal personality and are governed by the law of a country outside the UK.
What is a "qualifying estate"?
Essentially, this is a registrable interest in land (a freehold or a leasehold with a term over seven years).
Which "beneficial owner" will appear on the register?
A "beneficial owner" is anyone with: control of the board of directors; more than 25% of the shares/voting rights; or otherwise "significant influence or control".
Are there any ongoing obligations?
Yes! The Act includes an obligation on overseas entities to update the ROE annually.
What are the penalties for failing to register and keep the ROE updated?
Unless an overseas entity is designated exempt, failure to register on the ROE means it cannot be registered as the legal owner of property at HM Land Registry. Restrictions on the title will prevent a sale, lease or charge of the land.
There are also various civil and criminal penalties. Failure to update the ROE annually attracts fines of £2,500 a day and again prevents the sale or the charge of land and the grant of a lease. Arguably more serious, producing misleading, false or deceptive information to the registrar of companies incurs a potential unlimited fine/prison sentence of up to 2 years.
What is happening now?
The ROE became operational on the 1 August 2022, with the land registration elements operational from the 5 September 2022.
Overseas entities who already own qualifying property in the UK (excluding Northern Ireland where different rules apply) acquired at any time on or after 1 January 1999 will have 6 months from the date the register becomes live to register with Companies House.
Overseas entities acquiring a qualifying estate in the UK will be required to register with Companies House now. Note where an overseas entity is under contract to sell, purchase or grant a lease of a property prior to 1 August 2022 but completion takes place after that date, it can take advantage of the 6 month transitional period.
Overseas entities that have disposed of qualifying property (by sale of a freehold or the grant or assignment of a lease with 7 or more years in term or the grant of a legal charge) between 28 February 2022 and 31 January 2023 must provide details of all transactions to Companies House.
Who are the beneficial owners?
As with the register of beneficial owners of UK companies (the people with significant control or PSC register) those who will appear on the ROE are those considered to have ‘control’ over the overseas entity. The ‘beneficial owners’ are, broadly, those individuals or legal entities that:
- hold, directly or indirectly, more than 25% of the shares or voting rights
- are entitled, directly or indirectly, to appoint or remove directors holding a majority of the voting rights at board meetings on all or substantially all matters or
- have the right to exercise, or actually exercise, ‘significant influence or control’.
What does the Act mean for overseas borrowers?
An overseas borrower who fails to register would be unable to acquire legal title to land or sell, charge or lease land it already owns. Once registered on the ROE, it would be liable for daily fines and criminal penalties for failing to keep the ROE updated.
What does the Act mean for lenders?
The lender's position is not much better in that HM Land Registry's restriction on the title register would prevent the registration of the lender's security and could prevent the disposition of the property following an enforcement event.
Lenders may therefore be concerned about the effect of the Act:
- when seeking to take security over UK property owned by overseas entities and
- on the existing security they have taken over UK property owned by overseas entities, where the overseas entity fails to comply with the new regime and to become a ROE within the required time periods.
Lenders will wish to ensure new financing arrangements involving security over UK property owned by overseas entities address the requirements of the Act, and in addition may wish to review their existing security arrangements and contact any overseas entities who are under an obligation to register as a ROE. The further assurance clause within any relevant security document may be relied upon in support of that obligation where the application to register has not yet been made.
How should finance documents address the requirements in the Act?
It is crucial that additional representations, undertakings and conditions precedent are included in the finance documents, tailored to the requirements of the particular transaction, to ensure that overseas borrowers who acquire, dispose of or charge qualifying assets are in full compliance with the Act on completion. It is also important to include ongoing obligations to ensure that overseas borrowers comply with the updating obligation in the Act, to avoid issues affecting security, enforcement and the credit of the overseas borrower arising post completion.
Relevant provisions may include:
- provision of the overseas entity ID as a condition precedent
- an undertaking that the overseas entity will register as a ROE within a prescribed period
- an undertaking that the overseas entity will comply with the annual updating requirements throughout the term of the loan facility.
What's next?
Market practice is evolving in terms of drafting within finance documents to address the registration requirements under the Act and we await further legislation on the insolvency practitioner exception in order to properly advise lenders on how to exercise their enforcement powers to benefit from this exception.
Find out more
To discuss any of the issues raised in this article in more detail, please contact a member of our Real Estate team.
