As reported in our update earlier this month, the government proposes to create a public register of the beneficial owners of overseas entities which own property in the UK or are involved in UK government procurement. The new register will be held by Companies House and modelled on the register of persons with significant control which already applies to UK companies (the PSC register).

The government first outlined its proposals last year. Earlier this month it issued a call for evidence, asking interested parties for their views on how the new register can best be delivered. The deadline to submit views is 5pm on Monday 15 May 2017.

This briefing analyses the proposals in more detail and highlights practical implications for property transactions.

What is the aim of the new register?

The stated aims are to:

  • increase transparency
  • combat corruption and money laundering
  • protect the integrity and reputation of the UK property market.

The government is aiming to take a lead in this area and the new register will be the first of its kind in the world.

An overseas entity must register where it owns freehold land or a lease whose original term is over 21 years. The government says it is proposing 21 years to catch only leaseholds that are analogous to freeholds. However, if by this the government means leases which have a capital value, then the 21 year period is too low and could unnecessarily increase the compliance burden. In addition, it would be more appropriate for the requirement to be triggered by the number of years remaining unexpired rather than the term for which the lease was originally granted.

The requirements will only apply to ownership of registered land. However, they will also apply to an overseas entity buying, taking a long lease of or charging unregistered land as these transactions trigger first registration.

How often will the register need to be updated?

The information on the register will have to be updated at least every two years but can be updated more frequently. The government is considering making it a criminal offence not to keep the information up to date.

Overseas entities will not be able to buy or sell UK property unless they obtain a registration number and comply with the registration requirements. Entities that already own UK property will be given a grace period of a year during which they can decide to supply the required information or dispose of the property. If they wish to acquire additional property during that year they will have to register before they can do so.

The government proposes that when an overseas entity acquires a property, the Land Registry will enter a restriction on the register of title when the transaction is registered at the Land Registry. The restriction will prevent the entity from selling, charging or granting a "long lease" of the property unless the entity is fully compliant with the registration requirements.

When an overseas entity already owns UK property the Land Registry will automatically register a restriction a year after the changes come into force, regardless of whether or not the overseas entity has by then fully complied with the registration requirements. The entity will then have to comply before it can sell, grant a long lease of or charge the property.

The call for evidence does not specify what is meant by a "long lease", so we will query this in our response. However, there would be some logic in it being a lease for a term of over 21 years or the same as the length of lease term which will trigger the overseas entity registration requirements.

There is no detail about how the proposed restriction will be worded. Although the only evidence which the overseas entity needs to provide is its registration number, the proposal is that the Land Registry will use the registration number to check that the registration is complete and up to date. However, the Land Registry may not have the necessary resources to do this. The risk is that the requirements lead to uncertainty as to what is required for the Land Registry application to go through smoothly, or that an unacceptable risk is imposed on overseas entities or on those wishing to transact with them. More information is required on how this is to work in practice. In particular the wording of the restriction will need careful consideration.

The government proposes that when an overseas entity acquires a property, the Land Registry will enter a restriction on the register of title when the transaction is registered at the Land Registry. The restriction will prevent the entity from selling, charging or granting a "long lease" of the property unless the entity is fully compliant with the registration requirements.

When an overseas entity already owns UK property the Land Registry will automatically register a restriction a year after the changes come into force, regardless of whether or not the overseas entity has by then fully complied with the registration requirements. The entity will then have to comply before it can sell, grant a long lease of or charge the property.

The call for evidence does not specify what is meant by a "long lease", so we will query this in our response. However, there would be some logic in it being a lease for a term of over 21 years or the same as the length of lease term which will trigger the overseas entity registration requirements.

There is no detail about how the proposed restriction will be worded. Although the only evidence which the overseas entity needs to provide is its registration number, the proposal is that the Land Registry will use the registration number to check that the registration is complete and up to date. However, the Land Registry may not have the necessary resources to do this. The risk is that the requirements lead to uncertainty as to what is required for the Land Registry application to go through smoothly, or that an unacceptable risk is imposed on overseas entities or on those wishing to transact with them. More information is required on how this is to work in practice. In particular the wording of the restriction will need careful consideration.

What if an overseas entity buys property but has not complied with the registration requirements?

The Land Registry will cancel the registration application unless it includes the entity's registration number and the registration is complete and up to date. If the overseas entity is not compliant at the date of completion (not the date of registration) then the buyer will not acquire legal title, but only the beneficial interest. In that situation the seller will hold the property on trust for the overseas buyer.

This proposal is draconian. Whilst the aim is to ensure compliance, the legislation will still need to cater sensibly for situations where the buyer has not complied. If the legal and beneficial interests are held by different owners this will cause various technical problems. These would adversely affect not only the overseas entity buyer but also the seller and innocent third parties such as tenants and lenders. Furthermore, the call for evidence does not say what would happen if and when the compliance issue is subsequently resolved. Would the transaction then be capable of being "perfected" and if so how?

The government also says it wants to explore ways to prevent this situation arising. One option they suggest is for the transfer to be void (i.e. of no effect at all). This would admittedly avoid some of the technical problems referred to above, but where the buyer has paid the purchase price it would surely be unsatisfactory for it not to acquire any interest at all. The call for evidence also doesn't say what would happen to the underlying contract in that situation – would that also be void or would the obligations continue?

What if an overseas entity sells, leases or charges property but has not complied?

Where the seller is an overseas entity the proposed restriction on the register of title will alert buyers and lenders to the fact that a transfer, grant of a long lease or charge of the land will not be registered unless the seller has complied with the registration requirements. The proposal is that where an overseas entity purports to transfer, lease or charge a property but has not fully complied with the registration requirements, the transaction will be void. This would perhaps be more justifiable here than where the non-compliant overseas entity is the buyer (because, where it is the seller, the restriction on the register of title will mean the parties cannot fail to be aware of the requirements). However, it is still draconian and the same practical compliance burdens will fall on the parties and their solicitors here as in the situation where the buyer is an overseas entity.

Although the Land Registry will check the position at the point of registration, there will still be a burden on the parties and their solicitors in the course of a transaction, and this could cause delays and increase legal costs.

It will be critical for a seller/buyer/lender/tenant to be able to readily and objectively establish that the overseas entity is fully compliant before entering into a transaction. We will make this point clear in our response.

Other common situations will be affected:

  • Complicated commercial transactions which take a long time to come to fruition. A registration that was up to date at the outset may become out of date before completion
  • Conditional sale contracts where the completion date is not fixed at the outset but will be decided later by reference to specified factors. These contracts will need to oblige the overseas entity to comply with the registration requirements. They will also need to provide that the counterparty will not be obliged to complete unless the overseas entity is fully compliant on the completion date
  • Lenders will want to ensure that they obtain a charge over the legal title. We can therefore expect lenders to introduce a new condition precedent that an overseas entity borrower is fully compliant with the registration requirements.

Protection for lenders and other third parties

The government is keen to ensure that the new register does not prevent or interfere with any commercial arrangements that an overseas entity may enter into with a third party (an odd statement to make given the proposed restrictions). The only protection the government proposes, however, is for lenders. Where a property owned by an overseas entity is subject to a loan and the entity is in breach of the registration requirements, the lender will not be prevented from exercising its power of sale to recover the debt. It is not clear whether this proposal will also protect new lending where the overseas entity subsequent defaults on its registration requirements.

The government is also concerned that this creates a loophole where overseas entities in breach of the registration requirements could dispose of property under the guise of a lender. As such, this protection will only apply to "legitimate" lenders. The government seems unclear what this might mean and has asked for suggestions.

The government proposes that the same tests apply as for the PSC register. Beneficial owners will therefore mean persons who, directly or indirectly, hold more than 25% of the shares in the company or more than 25% of the voting rights in the company, or hold the power to appoint or remove the majority of the board of directors or persons who otherwise have the right to exercise (or actually do exercise) significant control over the company or any other relevant entity.

The government recognises that duplication should be avoided, so when the beneficial owner is a legal entity which itself has to provide information about its beneficial ownership to a publicly accessible register (for instance, the Netherlands propose a register similar to the PSC register), it will be enough to give that controlling entity's details and there will be no need to continue up the ownership chain.

This will be closely based on the requirements for the PSC register (name, date of birth, address, nationality and the nature of the person's control over the company). In order to ensure the information is accurate, the overseas entity will have to check the information with the beneficial owners before submitting it to Companies House. This could cause delays as the entity may not be able to force beneficial owners to confirm the position promptly. It is also possible that beneficial owners will refuse to supply the required confirmation. The overseas entity will be required to take "reasonable steps" to find out who the beneficial owners are, which would include checking registers of members or shareholders, articles of association and other relevant documents. As with the existing PSC regime, the government will issue guidance on what constitutes reasonable steps.

If, despite having taking reasonable steps, an overseas entity is unable to supply full details of its beneficial owners, or has been unable to establish if it has any beneficial owners (perhaps because shares are held anonymously), it will be able to comply with the requirements by making a statement to this effect. To guard against abuse, the government proposes a criminal offence of supplying misleading information to the register.

The PSC regime is generally acknowledged to be complex and mistakes are sometimes made as the system is not well understood by users. As the new overseas entities register is to be based on similar principles it is likely to suffer from the same issues until these are resolved.

The government wants to ensure that all parties involved in property deals are made aware of the new requirements as soon as possible and is seeking views on how this can be achieved. We presume details would be included on the government website and that there would be announcements in the UK press. It would also be appropriate to inform the relevant professional bodies whose members act for overseas entities in relation to UK property transactions (such as RICS, NAEA, ARLA, national Law Societies, the Solicitors Regulation Authority and equivalent organisations).

The proposed registration requirements apply not just to ownership of UK property but also to procurement. The call for evidence sets out – and asks for views on - three options for how the scheme might operate for overseas entities involved in bidding for government contracts. These are:

  • requiring the preferred supplier to provide its beneficial ownership information as a condition of being awarded the contract
  • excluding bids from entities that have not provided beneficial ownership information (this could result in a three-year exclusion from bidding for that contracting authority's contracts)
  • treating bids without specified ownership information as incomplete or non-compliant and rejecting them on these grounds (this exclusion would apply only to the procurement exercise in question and would not result in a three-year exclusion).

The call for evidence recognises that in creating the register the government needs to be sensitive to the likely economic impacts. It asks for evidence of likely impact. We consider that the best way to minimise economic impact is to ensure that the provisions are appropriate, clear and workable. Assuming that can be achieved, we do not anticipate that the registration requirements will have a long-term impact on the UK residential or commercial property market but there might be short-term impact in terms of delayed or even aborted deals while the changes bed down.

The register requirements will impose a significant compliance burden on overseas entities which want to participate in the UK property market and potentially impose additional costs on UK entities transacting with them. We will be responding to the call for evidence to give our observations on the proposals and raise the issues we have identified, including those we have referred to above. If you have any comments or questions, or would like to contribute to our response, we would be very pleased to hear from you.

For the call for evidence please see here.