David Seymour, Ropes & Gray real estate partner, analyses the new register of overseas beneficial owners of UK real estate.
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Real estate is an operational asset by its very nature and it has many touchpoints with the various parties involved in its lifecycle. Any overseas entity can acquire UK real estate and there's no direct way of tracking who, ultimately, owns and controls it. With over £122 billion of UK real estate held by overseas entities, the government is keen to promote transparency in this sector and it's recently conducted a consultation into a new register to record those individuals that beneficially own it – and this will be the first of its kind in the world. It's a question of when, not if, the register will come into force. The key issue is how it will be implemented. But what does seem clear is that a failure to comply could lead to criminal liability and it could impede transactions, so it's a development that needs to be understood.
In broad terms, a beneficial owner is a person that has the right to enjoy the possession and ownership of property, such as the right to the receipt of income. And to set some parameters for this, in the context of the new register, the government is proposing to adopt a similar scheme to that, which we have in the UK already, for the persons of significant control regime, which was adopted in 2016. So that would mean that a beneficial owner is any person who, directly or indirectly:
- Firstly, holds 25% or more of the voting rights or shares in an entity; or
- Secondly, has the power to appoint or remove a majority of the board of directors; or
- Thirdly, exercises or is capable of exercising significant control or influence over an entity.
The register will be publically available and when it's viewed alongside the land registry records, it will reveal those individuals that, both legally and beneficially, own the real estate. All overseas entities, whether or not they're companies, will have to comply and it will be incumbent on them to provide details of their beneficial owners to Companies House, in order to obtain a registration number. And that registration number will, in turn, be used by the land registry to register a transfer, the grant of a registerable lease, or a charge.
The government's proposing that it will be a criminal offense for any person to, knowingly or recklessly, provide false or misleading information to Companies House about its beneficial owners and also to put a note on the registered title of all qualifying UK property, which will effectively prevent any overseas entity who has not complied in that one-year period from selling, granting a lease, or from charging. So in other words, investors will have a year to comply, otherwise, face a restriction on transacting. For new transactions, the land registry simply will not register them without the registration number from Companies House. There's also a suggestion that the underlying transaction may be void, which seems draconian and we hope that the government heeds concerns raised as part of the consultation that any noncompliance may be cured retrospectively.
In practice, it will be a due diligence issue for investors, for lenders, and for tenants. And it will also impose an additional layer of administration and an ongoing compliance burden, as there'll be an obligation to update the register as there are changes in beneficial ownership, which meet the registration requirements, and, as a minimum, at least once every two years. In the consultation, the government was mindful of the need for this new regime to be both be workable and proportionate and that it shouldn't deter overseas investment – and that has to be right. The government was also sensitive to the needs of lenders, particularly those who are seeking to enforce security over UK real estate, where they have a noncompliant overseas borrower. It goes without saying that the proposals are welcome to promote transparency in the sector, but we hope that in implementing this new regime, the government produces a scheme which is both pragmatic and sensible.