As part of the UK government initiative to clamp down on criminals using UK property to launder their illegally obtained money, the government is introducing some sweeping disclosure requirements in the form of a ‘Register of Overseas Entities’ (the “Register”) which will require overseas entities to register with, and provide details of their beneficial owners to, Companies House before the overseas entity can be registered as the legal owner of UK property. These rules have been under consideration since 2018 but the government seems to have accelerated their enactment following Russia’s invasion of Ukraine and the associated imposition of sanctions on persons linked to President Putin’s regime.
The proposed new rules on the Register have been introduced as part of the Economic Crime (Transparency and Enforcement) Bill which had its first reading in the House of Commons on Tuesday 1 March 2022. A date for its second reading is yet to be announced but the expectation (based the government’s public statements) is that this bill will likely be pushed through parliament and enacted very quickly.
Some key points to note on the proposed new rules relating to the Register:
- The Register will apply to overseas entities (non-UK companies and other registered bodies with legal personality that can own property in their own right) (“Overseas Entities”). Overseas partnerships/trusts (without legal personality) seem to be excluded which could create a large gap in respect of persons owning indirect economic/beneficial interests in UK property via overseas partnerships/trust structures which do not have legal personality. This would be a strange gap to leave in the rules given the stated aim of the Register.
- An Overseas Entity that owns (or acquires) qualifying property (meaning a freehold estate, or a leasehold estate granted for more than seven years, in land in England and Wales) must report information about its beneficial owner(s). For Overseas Entities which already own qualifying property, the rules will apply retrospectively to all such qualifying property acquired since January 1999 in England and Wales. Different rules will apply to Scotland and Northern Ireland.
- The definition of beneficial owners is copied from the definition of PSC (“Persons with Significant Control”) which applies to reporting for UK companies and LLPs, and the legislation seeks to put foreign companies/entities owning UK property on a level playing field with UK companies/entities when it comes to beneficial ownership reporting. Essentially, a beneficial owner will be a person who is considered to have ‘significant influence or control’ over the Overseas Entity (for example, any person who holds more than 25% of the shares or voting rights or can otherwise exercise significant influence or control over it), whether an individual, legal entity or a government or public authority.
- The reported information will be maintained by Companies House and will be public in the same way as the PSC register is for UK companies/entities.
Companies House will verify the information and then issue an identification number (“ID”). Without this ID, the Land Registry will not register the Overseas Entity as the owner of the relevant English or Welsh property. The Overseas Entity will have a duty to update the Register regularly (at least every 12 months from the date of its registration) to retain its status as a “registered overseas entity.” Failure to comply with these requirements will enable the Land Registry to place restrictions on the title register of the qualifying property to prevent any sales, charges and leases being registered Again, Scotland and Northern Ireland will have their own rules in this respect.
- Overseas Entities that already own qualifying property will have 18 months from the date when the legislation is implemented (although there is a proposal to reduce this period — see below) to register and obtain the ID by providing the required beneficial ownership information to Companies House.
- It will be a criminal offence both for the Overseas Entity and each of its officers to make/purport to make any disposition of the qualifying property that is restricted as set out above, or to fail to provide an update on the information on the Register annually, or to deliver (or cause to be delivered) misleading, false or deceptive information to Companies House. Non-criminal financial penalties may also apply in the alternative.
According to the record in Hansard, the government intends to push the bill through all the stages in the House of Commons today (7 March 2022) and debate the bill in the House of Lords during the course of this week and receive Royal Assent as early as 9 or 10 March 2022. It remains to be seen if this timetable is feasible as we understand a number of amendments have been submitted, including a proposal by the opposition Labour party to reduce the initial 18-month period for registration to 28 days.
Given the likely imminent enactment of these rules, a few immediate action points that UK real estate investors with Overseas Entities in their structure may want to consider:
- Get a head start and identify any registrable beneficial owners of their Overseas Entities and start gathering the relevant information required for registration.
- If currently dealing or negotiating with an Overseas Entity, whether on a sale, acquisition, letting, financing or as a joint venture vehicle relating to qualifying property, bear in mind that there will be a need to diligence the Overseas Entity’s registration status and obtain contractual protection, including, where relevant, in respect of the Overseas Entity’s annual updating obligation.
- If you are considering an acquisition of qualifying property with an Overseas Entity purchaser, incorporate the Overseas Entity as soon as possible so that you are ready to apply for the ID immediately once the new rules take effect.
- Consider the impact on existing contractual arrangements, e.g., any conditional contracts, options, rights of pre-emption and agreements for lease, already entered into.
Needless to say, timing of registration could become a major issue with the implementation of the Register as we would expect Companies House to be inundated with applications for ID numbers over the course of the year. The government will have to clarify what an Overseas Entity can do in the interim period whist it is waiting for an ID to be issued; ideally it would be able to buy/sell/charge/let the relevant qualifying property in the interim period but we will have to watch this space.