Following the passing of the Economic Crime (Transparency and Enforcement) Bill back in March 2022, the UK government and Companies House have launched the long-awaited Register of Overseas Entities (the Register), going live on August 1.
As a key component of the Economic Crime (Transparency and Enforcement) Act 2022 (the Act), the Register seeks to establish clarity around the identity of those controlling the overseas entities that own UK land and ultimately to act as a deterrent to those who aspire to launder the proceeds of crime through such ownership.
The Register, which Companies House will hold and maintain, is therefore designed to ensure that the identity of such UK property-owning overseas entities and their beneficial owners becomes a matter of public record.
o February 28, 2022 – Any overseas entity that has disposed of a "qualifying estate" after this date will be obliged to notify Companies House of its beneficial ownership at the date of disposition, even if it no longer owns a "qualifying estate."
Registration requirements and the Transitional Period
The introduction of the Register on August 1 triggers a six-month transitional period expiring on January 31, 2023 (the Transitional Period), in which all overseas entities that own a "qualifying estate" (being a freehold estate in land or a leasehold estate in land granted for a term of more than seven years) in England and Wales that has been acquired since January 1, 1999, must apply to Companies House for registration. Although the Act and Register apply to all home nations, there are different relevant dates for Scotland and Northern Ireland, with differing effects on the land registration regimes in those jurisdictions; however, this note concerns only the impact in England and Wales.
Overseas entities that owned a qualifying estate on February 28, 2022, but have subsequently disposed of their interest must also submit an application to register, based on their beneficial ownership immediately before the relevant disposition.
What information must be submitted?
When applying to be registered, an overseas entity must provide certain "required information" in relation to itself and any beneficial owners. The regime around beneficial ownership mirrors the threshold of the existing "persons with significant control" requirements, being persons with 25% of shares or voting rights in the relevant overseas entity.
Such "required information" differs depending on the relevant party, which can be the overseas entity itself, registrable beneficial owners, managing officers, and trusts, and ranges from the name and address of the entity/individual to the details of any public register an entity appears on.
A full list of the required information is provided in Schedule 1 of the Act.
The overseas entity must also provide a statement setting out either the existence or absence of one or more registrable beneficial owners and, where relevant, whether such required information is obtainable. They must also disclose where there is reason to suspect that there is a registrable beneficial owner that has not been successfully identified.
In addition to the initial requirement to register, registered overseas entities must comply with an annual updating duty. Failure to comply with the registration and updating obligations will be a criminal offense.
Verification of information
The information provided to Companies House (both in respect of the original application for registration and in relation to ongoing compliance with the annual updating duty) must be verified by a "relevant person" prior to submission.
A relevant person is a UK-based agent supervised under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, which includes independent legal professionals, trust and company service providers, and external accountants.
At the time of writing there is an apparent shortage of entities offering verification services for these purposes, perhaps due in part to the novelty of the regime and also the criminal penalties that can be imposed for improper verification. Although certain agencies (principally corporate service providers) are exploring the possibility of providing the verification service, the limited number of active agencies at the outset may result in initial delays in the process.
Land Registry and the Overseas Entity ID
On successful registration of an overseas entity, Companies House will provide the entity with a unique overseas entity ID number (OEID) and record this in the Register.
Overseas entities already holding a qualifying estate must have an OEID by January 31, 2023, or may face criminal penalties.
After September 5, 2022, any overseas entity that does not already own a qualifying estate will need an OEID to apply to register its acquisition of a qualifying estate at the Land Registry.
In addition, from September 5, 2022, the Land Registry will place a restriction on the registered titles of land acquired by overseas entities, preventing disposal of the land (by way of transfer, a lease of more than seven years, or a charge by way of legal mortgage) unless one of the following exceptions applies:
- The overseas entity is registered on the Register or exempt (at the time of writing there are no exempt overseas entities, and the UK government has indicated that it has no intentions of enacting regulations to introduce any).
- Dispositions made in accordance with a contract which was entered into prior to the restriction being entered onto the title register of the relevant property.
- Dispositions made under a power of sale pursuant to a registered charge.
- Dispositions made pursuant to a court order.
- Dispositions made by an insolvency practitioner in certain circumstances (regulations are required to be introduced to specify these circumstances).
Where an overseas entity was already the registered owner of a qualifying property at the Land Registry, or in the process of being registered, on August 1, 2022, such a restriction will take effect on February 1, 2023.
Where an overseas entity has made an application to the Land Registry to be registered as proprietor of the qualifying estate after August 1, 2022, such a restriction will take immediate effect.
Implications for borrowers and lenders in a real estate finance context
During and after the Transitional Period, any lenders seeking to take security over qualifying estates owned by overseas entity borrowers/chargors will also need to be satisfied that the Act has been complied with.
Charges over qualifying estates already owned by the relevant overseas entity chargor as at August 1, 2022
With regard to the charging of qualifying estates already owed by an overseas entity borrower as at August 1, 2022, charges can be taken over such land interests without concern, provided the application to register that charge against the property is submitted prior to the end of the Transitional Period (ending on January 31, 2023).
However, if the application to register that charge is rejected by the Land Registry or otherwise canceled and requires resubmission following the end of the Transitional Period, this will not be possible unless the overseas entity chargor held an OEID at the date of the charge. In such circumstances, the charge will exist in equity only and therefore will lose priority to any subsequent legal mortgages.
Registration by the overseas entity on the Register and a subsequent obtaining of an OEID following the entering into of the charge will not cure this issue, as the restriction on title will specifically dictate that the overseas entity must have been registered at the date of the disposition (i.e., the date the charge was entered into).
Accordingly, during the Transitional Period, where is it not feasible for the overseas entity chargor to have an OEID in place at the date of the charge (e.g., due to transaction timeline pressures), the instrument should include specific further assurance provisions obliging the overseas entity chargor to enter into a supplemental mortgage where required by the lender, once the OEID has been obtained.
Charges over qualifying estates (i) not yet owned and therefore to be acquired by the relevant overseas entity chargor following August 1, 2022, or (ii) entered into after January 31, 2023
As a condition precedent to lending, lenders should require evidence that the overseas entity is registered by providing the OEID to ensure that the charge will be registered against the relevant property by the Land Registry.
From an ongoing documentary perspective, lenders may also wish to supplement the usual "compliance with laws" undertaking with an information delivery undertaking showing compliance with the annual updating duty or an undertaking to maintain such compliance.
As noted above, one of the exceptions to the restriction that will be placed on the title of qualifying estates owned by overseas entities is any disposition made in exercise of a power of sale or leasing in favor of a registered charge-holder (or receiver appointed by such charge-holder).
For lenders, this means that any failure by an overseas entity borrower to register prior to the end of the Transitional Period should not prejudice the lender's ability to enforce its existing charge over that property.
In response to the launch of the Register, overseas entities (or corporate groups containing UK property-owning overseas entities) should review their portfolios and identify the relevant entities that require registration.
Once identified, a "relevant person" should be appointed to verify the relevant information required for the various registrations with a view to commencing the registration process.
Given the expected delays in the process resulting from its infancy, to avoid transactional delays, particular focus should be placed on those entities anticipated to acquire or dispose of qualifying estates within the next six to 12 months.
A further economic crime bill, setting out any corrective provisions, is expected during the 2022–23 parliamentary session. Sidley will be publishing further guidance as the situation develops.
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