The Economic Crime (Transparency and Enforcement) Act 2022 (the Act) was recently passed into law and contains provisions that will establish a publicly accessible register of overseas entities’ UK property ownership (the Register) at Companies House.

The impact of the Act is far-reaching, not only for overseas entities but also for parties who deal with them, attracting criminal sanctions for non-compliance. In this article, we look at the practical implications of the new regime and what parties can do to protect themselves.

Who is caught by the Act?

The Act applies to all overseas entities that acquired a ‘qualifying estate’ (ie a freehold title or a leasehold title granted for a lease of seven years or more) in England and Wales on or after 1 January 1999 or will acquire land in the future. It also applies to any overseas entities that disposed of a qualifying estate on or after 28 February 2022. Overseas entities caught by the regime will effectively be compelled to register their details along with those of their beneficial owners at Companies House.

What is an overseas entity?

Broadly, an overseas entity is a legal entity that is governed by the law of a country or territory outside the UK. This would include, for example, non-UK incorporated companies, LLPs, foreign foundations and non-UK partnerships with a legal personality. While non-UK trusts are not overseas entities as they do not have a separate legal personality, those that hold UK property indirectly through an overseas entity will be caught.

For further details on how the regime will affect trust arrangements, read our article here.

Who is a ‘beneficial owner’?

The overseas entity applying for registration will need to take reasonable steps to identify a registrable beneficial owner. A beneficial owner is defined as an individual who:

  • holds more than 25% of shares in the company;
  • holds more than 25% of the voting rights in the company;
  • holds the right to exercise, or actually exercises, significant control over the company;
  • holds the right to appoint or remove the majority of the board of directors of the company; or
  • exercises or has the right to exercise significant control over the activities of that trust or other entity that meets any of the above conditions.

The overseas entity should give notice to anyone that it has reasonable cause to believe is a registerable beneficial owner. Failure to comply with the notice will be a criminal offence.

What information will be required?

The information which overseas entities are required to obtain and provide about registrable beneficial owners will depend on the nature of the beneficial owner (for example, whether they are an individual, legal entity, trustee etc), although it will generally include their name, address, form/legal entity of the beneficial owner, along with which condition is met to qualify as a registrable beneficial owner.

Following disclosure of the required information, verification and registration of the same, Companies House will issue an overseas entity ID and record this ID in the Register.

Moreover, in order to retain its registered status, an overseas entity must comply with the ongoing duty to update the Register at least every 12 months. Companies House will also need to be notified when an overseas entity requires beneficial owners to be removed from the Register.

What are the consequences of non-compliance?

Without an overseas entity ID, the overseas entity cannot be registered as a legal owner of the property. This will effectively prevent the entity from acquiring new property or being able to sell, grant a lease for more than seven years or grant a legal charge over a qualifying estate, as the disposition will be incapable of being registered with the Land Registry. As part of this process, the Land Registry will be required to enter restrictions against the titles to any qualifying estates owned by overseas entities, so preventing any dealings with the property by the overseas entity.

The restriction will also affect dealings with other parties to a transaction, such as buyers, lenders or tenants. Any transaction with an overseas entity will not be registrable at the Land Registry unless the identification information is publicly available on the Register in compliance with the Act.

Failure to apply for registration or to update the information of beneficial ownership is a criminal offence, ranging from daily fines of £2,500 (for example, where failing to update the Register) to imprisonment. Further, every officer of the overseas entity in default may face an unlimited fine and/or up to two years in prison.

Are there any exemptions from registration?

Where a qualifying estate is held through a chain of legal entities (such as overseas companies), the general rule is that overseas entities must look up through the structure to determine their ultimate beneficial owners. However, a beneficial owner will not need to be registered if it holds an interest solely through an entity which is subject to its own disclosure requirements.

This will be the case if, for example, the beneficial owner holds its interest through a UK company which complies with the ‘Persons with Significant Control’ regime or an overseas entity that is subject to registration under the Act. Further considerations will apply where, for example, there are trusts or nominee arrangements in place.

The Act also enables the Secretary of State to exempt a person from the registration requirement where it is in the interests of national security or to prevent or detect serious crime, although this is anticipated to be of limited application.

When will overseas entities need to register by?

  • Existing owners - for overseas entities that already own a qualifying estate in England or Wales or acquired it before the Act comes into force, there will be a transitional period of six months for the overseas entity to register at Companies House. This will apply regardless of whether the overseas entity owns the land at the end of the transitional period.As mentioned above, the retrospective reach is vast, applying to any registered freeholds or leaseholds of seven or more years acquired since 1 January 1999. The framework applies slightly differently in Scotland and Northern Ireland.The six-month transitional period has not yet started and will be specified in regulations to be passed in due course.
  • Disposals - Overseas entities applying for registration during the transitional period will also be required to provide information on any dispositions of registrable land (namely, any transfer, grant of legal charge or lease exceeding seven years) which they have made since 28 February 2022 or state that there has been none.Notably, if an overseas entity makes any such dispositions between 28 February 2022 and the end of the transitional period, it will still be required to make an application to register even if it no longer holds any qualifying estate. This aims to capture any overseas entities that make disposals in the interim which would otherwise avoid scrutiny and disclosure of relevant details to Companies House.Non-compliance will result in the entity and its officers being liable to daily fines.
  • Future acquisitions – for future acquisitions after the Register is enacted, it will not be possible for an overseas entity to be registered as the proprietor of land without first registering at Companies House.

What are the practical implications of the regime?

Overseas entities Compliance with registration requirements may be time-consuming for entities with complex corporate ownership structures. Overseas entities should establish if they hold any qualifying estates within their structures and/or if they have made any dispositions since 28 February 2022. They should then begin collecting the required information about the entity and the beneficial owners once identified in order to be in a position to comply with registration within the transitional period.

Real estate transactions Apart from the necessary information-gathering exercise mentioned above, overseas entities (and other parties involved in transactions with overseas entities) should consider if they are party to any existing (or future) real estate contracts under which protection may be required under the Act, and whether any variations need to be made to those contracts.

Consideration of the Act will be particularly relevant where there is a large gap between exchange and intended completion that takes completion beyond the end of the transition period. In such cases, the parties should consider additional drafting to ensure that the overseas entities comply with the relevant registration requirements and, where a restriction on title has been already entered, to take steps to remove that restriction. The parties will also need to negotiate the terms relating to the consequences of not complying with those contractual obligations relating to the Act.

Corporate transactions Parties to corporate transactions involving overseas entities including, for example, those with corporate wrappers, M&A, joint ventures and parties looking to provide investment funding, should consider contractual protections, such as conditions precedent requiring an overseas entity to be registered by a long-stop date and, if the contractual relationship will be ongoing, including undertakings from the overseas entity to comply with its annual updating at Companies House.

Going forward, extra levels of due diligence will also be required to ensure that the overseas entity appears on the Register, that there are no restrictions at the Land Registry and, in due course, that they have complied with their reporting obligations at Companies House.

Lenders Lenders should ensure that appropriate obligations are included in the finance documents. For example, undertakings that the overseas entity will: apply to be duly registered within the transitional period (or beyond that, by a certain date); comply with the annual update requirements; and provide the lender with evidence of such registration and ongoing compliance. The ability for a borrower or chargor to grant a registrable lease should also be considered, for example, by including an undertaking that where such a lease is to be granted to an overseas entity, they will apply to be duly registered within a given timeframe.

Commentary

While the Act has garnered much attention, we await secondary legislation to enact the regime and provide further details on how the Register will operate in practice. This will also require key operational changes at Companies House and the Land Registry and the Government may well want to tie in any changes with the wider package of reforms announced in February 2022 to promote corporate transparency (read our article here).

Nevertheless, given the uncertainty around timing for implementation and the short transitional period for registration, affected overseas entities should consider how to comply with their registration obligations as soon as possible.