The Government's new Register of Overseas Entities opened on Monday, 1 August 2022 pursuant to the Economic Crime (Transparency and Enforcement) Act 2022. Restrictions in the Act on dealing with UK property will come into force on Monday, 5 September 2022. The idea behind the phased commencement is to allow overseas entities a window in which to become registered on the new Register of Overseas Entities before the property restrictions bite.

If your business is involved in selling, buying or leasing UK property through overseas entities, then the Act could apply to you. Although the Act applies throughout the UK, this note refers to the position in England and Wales only. There are minor differences that apply in Scotland but the rules are broadly no more onerous than the provisions described below.

A brief reminder: how does the Act affect Real Estate transactions?

In very broad and simplified terms, the Act will require an overseas entity to become a registered overseas entity (more on what this means below) in the following scenarios:

  • it currently owns a qualifying estate (i.e. a freehold or a lease of more than seven years from the date of grant which it acquired on or after 1 January 1999), in which case it must become registered before 1 February 2023;
  • it wishes to sell, grant a lease of more than seven years or grant a legal charge of a UK qualifying estate it already owns where the related application to the Land Registry will be submitted on or after 1 February 2023; or
  • it wishes to buy or become the tenant of a UK qualifying estate where its application to the Land Registry will be submitted on or after 5 September 2022.

Transactions made in breach of the Act will not be void, but will not be registrable at the Land Register. This is undesirable for both parties as it means that legal title to the land interest will not pass (so for example, an overseas entity would not become the registered proprietor of a property that it purchased if it had not first become a registered overseas entity). Failure to comply with many parts of the Act is a criminal offence and exposes the defaulting party to significant fines.

The Act does not restrict the sale or purchase of a property via the acquisition or disposal of the shares in the overseas property-owning company, although it would capture a standard security granted by that overseas company as part of the transaction. However, from 1 February 2023, any overseas entity which owns UK property must be registered on the Register of Overseas Entities and this registration would need to be checked before, and updated at the relevant time after, completion of such a share sale.

Finally, it is worth mentioning that if an overseas entity holds or purchases property through a UK entity (rather than through an overseas entity) the registration duties under the Act do not apply. However, UK entities cannot ignore the Act completely as the Land Register provisions will apply to any transactions undertaken with an overseas entity (more on this below).

How do I become a registered overseas entity?

You need to apply online to Companies House. The application requires you to file information about your beneficial owners and managing officers (as well as other details) and keep this information updated annually. A beneficial owner is, broadly, a person owning 25% or more of the shares or voting rights in that entity, or a person who has a right to appoint or remove a majority of the board of directors, or who exercises or is entitled to exercise significant control or influence over the entity. Although, at first glance, the rules appear similar to the Persons of Significant Control register or anti-money laundering /client due diligence checks, the requirements are different and more onerous. Before you can submit your application, you have to:

  • serve an "information notice" on each beneficial owner to confirm their details are correct, and you must give them one month to reply although there is nothing to prevent them replying earlier (Note: We expected that overseas entities would be required to use a prescribed form of notice but no such prescribed form has been introduced so we assume, for the time being, that any sensible form of notice which requests the information set out in section 12 of the Act will suffice); and
  • ensure that the information in your application is independently verified (see below for more information).

Once the application is accepted, Companies House will issue a registered overseas entity ID number which serves as evidence of registration.

How can I get the information in my application independently verified?

The information in your application must be independently verified by a UK-based "relevant person" before submission. The definition of "relevant person" includes financial institutions, auditors, tax advisers, independent legal professionals and trust or company service providers (among others). The legislative definition is complex and a detailed analysis as to what constitutes a relevant person should be carried out (for example, an asset manager – whilst they may be independent – may not always fall within the definition).

The nature of the verification obligation is draconian. Verification must be conducted by reference to documents or information obtained from a reliable, independent source but the legislation is silent as to the level of due diligence that the verifier would be expected to carry out on these documents (and detailed due diligence in any case would be difficult for a UK relevant person to carry out in relation to an overseas entity). BEIS has published Guidance on registration and verification of overseas entities which gives some parameters around the level of verification they believe is required. The stakes are high for verifiers, who face criminal liability if they deliver (or cause to be delivered) materially false or misleading information to Companies House or make statements which are materially false or misleading.

Due to these onerous obligations, many relevant persons (including DLA Piper, in line with many other law firms) feel unable to provide verification and registration services under the Act at this stage.

DLA Piper is currently seeking to identify organisations who are willing to become independent verifiers. If you need assistance finding a relevant person to verify your application, please contact our Scotland Head of Real Estate below or your usual DLA Piper contact who will be able to provide the latest information we have. It is important that you make contact with a relevant person as quickly as possible so that you can submit your application to Companies House promptly.

Are there any transitional provisions when the Act first comes into force?

There is a six month transitional period, beginning on 1 August 2022 and ending on 31 January 2023.

Dispositions (ie delivery of a disposition, standard security, lease, or assignation of lease) by an overseas entity which complete during this period can be registered at the Land RegistryRegister (as long as the Land RegistryRegister application is also submitted before the end of the transitional period) even if the seller/landlord is not yet a registered overseas entity. However, the seller/landlord still has a duty to file beneficial ownership information at Companies House in order to become a registered overseas entity by the end of the transitional period. Failure to do so is a criminal offence. If it has made any dispositions which completed between 28 February 2022 and the end of the transitional period, it must also disclose details of those to Companies House.

Acquisitions by an overseas entity do not benefit from the transitional period. From 5 September 2022, the buyer/tenant will need to be a registered overseas entity before it can apply to the Land RegistryRegister to obtain legal title to the property it has acquired (even if the acquisition completes during the transitional period).

Are there any exemptions?

The Act provides for certain entities to be designated as exempt, but the Government has not yet made any such designations. There are also certain types of disposition that may be exempt, for example, dispositions by overseas entities completed pursuant to a contract entered into before 5 September 2022. (Again, please note that disposition includes the grant or assignation of a lease and the grant standard security (ie. legal charge).)). There are no exemptions for acquisitions.

What are the penalties for non-compliance?

There are criminal sanctions for non-compliance with certain parts of the Act. Below is a table of the penalties that apply in some key areas:

 

What action should I take now?

Now that the new Register is operational, there are some practical steps you can take – depending on what type of entity you are.

  • Overseas entities acquiring property (urgent action may be required): get registered quickly. If you are due to acquire imminently and your Land Register application might be submitted on or after 5 September 2022 (even if the transaction completes before that date), you must be a registered overseas entity in order to obtain legal title to the property. Becoming registered quickly is vital. The two most important steps you can take now in order to save time are:
    • reach out to your beneficial owners to check the information you hold about them – this starts the clock running on the one month period for your beneficial owners to respond to the notice; and
    • try to make contact with a relevant person who can verify the information in your application. You can then prepare the other aspects of your application to help you make a swift application once you hear back from your beneficial owners. In the initial days and weeks after opening, registrations may take a little longer so the quicker you can apply, the better.
  • Overseas entities which own land which they acquired on or after 8 December 2014 (ownership or a lease of more than 20 years)*: you must become a registered overseas entity by 31 January 2023 to avoid committing a criminal offence and thereafter comply with the annual updating duty. *(Note: In England and Wales the equivalent term of a lease is more than 7 years, and the equivalent acquisition date is on or after 1 January 1999.)
  • Overseas entities disposing of UK property that they already own: get registered promptly so that you will be able to make dispositions on or after 1 February 2023. Also, start gathering information about dispositions you have made since 28 February 2022 (and any you make up to 31 January 2023), as details of such dispositions will need to be submitted to Companies House even if you no longer hold any UK property by the end of the transitional period on 31 January 2023.
  • Overseas lenders taking security over property: if you are an overseas lender or security agent, you will not have to become a registered overseas entity in order to take a standard security over a qualifying estate. However, you will want to ensure that overseas borrowers are compliant with the Act. For example, you may wish to include conditions precedent evidencing due registration, supported by warranties as to the accuracy of the information submitted and undertakings to comply with the annual updating duty throughout the life of the loan.
  • UK entities contracting with overseas entities: even if you are not an overseas entity, if the counterparty to your transaction is an overseas entity you may wish to ensure that they are required to take steps to become a registered overseas entity and to produce evidence of such registration. This may need to be supported by additional warranties or undertakings. Your legal advisers can advise you as to the contractual provisions that are appropriate for your transaction.

The Act is complex and this note is only a simplified guide to some of the most important issues. The key to ensuring that you are on the right side of compliance is to get timely advice. Please feel free to get in touch with our Scotland Head of Real Estate below or speak to your usual DLA Piper contact.