The Economic Crime (Transparency and Enforcement) Act 2022 (the Act) implemented proposals which had languished in the parliamentary weeds since 2017. The impetus given by the invasion of Ukraine meant the legislation was catapulted from introduction to Royal Assent in 15 days - something of a record. The necessary regulatory infrastructure will take slightly longer to assemble, involving Companies House and the three UK land registries, but such is the political imperative that we anticipate the Act will come into force in early summer 2022. This briefing summarises the impact of the Act’s introduction of a Register of Overseas Entities on those dealing with UK real estate and their advisers. The Act also includes provisions around the use of unexplained wealth orders and sanctions on individuals but those aspects are not covered here.
Overseas entities
Despite the tone and content of official announcements, the Register will extend to all overseas entities (not just those linked to Russia or suspected money laundering) and so the increased compliance burden will have implications for all foreign corporate owners of UK property.
The duty to register imposed by the Act applies to any company, partnership or other entity which is a legal person in any jurisdiction situated outside the United Kingdom (so includes Channel Islands and Isle of Man corporate structures) which owns or becomes the owner of qualifying real estate located within the UK. The expression “qualifying real estate” means any freehold or registerable lease where the overseas entity’s title was registered on or after 1 January 1999 in England & Wales or after 8 December 2014 in Scotland. The Act only applies to real estate in Northern Ireland acquired by an overseas entity after the Act is implemented.
Register of Overseas Entities (the Register)
Companies House will maintain a register of all overseas entities, including details of their beneficial ownership and the individual beneficial owners of any corporate beneficial owners. This will be available for public inspection. Beneficial owners under the Act are broadly those who (directly or indirectly) have:
- 25% or more or the shares or voting rights in the overseas entity; and/or
- the right to appoint or remove a majority of the board of directors; and/ or
- the ability to exercise significant control or influence over the overseas entity.
The details required about the beneficial owners will include the individual’s name, date of birth, nationality, residential and service addresses, whether they hold as a trustee and whether they are subject to any financial sanctions under the Sanctions and Anti Money Laundering Act 2018.
Overseas entities who currently own UK real estate
Any overseas entity currently owning property within the UK will:
- need to apply for entry on the Register by supplying the required information about itself, its beneficial ownership and details of those individuals or entities who are its beneficial owners as defined by the Act. The Register is not yet open to applications, but a date in June 2022 is being suggested. The deadline to apply will be 6 months after the commencement date;
- need to keep a record of any disposal of UK land after 28 February 2022 because, on application for registration, they must either confirm that they have made no disposition of qualifying UK land since 28 February 2022 or supply details of any dealings since that date and their beneficial ownership at the time;
- have to update their registered details annually whilst they are the registered owner of any UK freehold or leasehold title; and
- be prohibited from selling, charging or letting (for more than 7 years in England & Wales or 21 years in Scotland and Northern Ireland) UK land unless registered.
Each of the UK land registries will adopt appropriate mechanisms to prevent the registration of any sale, charge or qualifying lease by an unregistered overseas entity.
Non-compliance
Failure to comply with the Act attracts criminal penalties of fines (including a daily default rate maximum of £2500 for failure to register or update) and potentially imprisonment for a term of up to 5 years.
Moreover, if an overseas entity transfers, lets or charges UK real estate in breach of the restrictions that in itself is a criminal offence. This brings the property which is the subject of such a transaction within the definition of criminal property as defined in the Proceeds of Crime Act 2002, with professional duties for any legal advisers acting on the transaction.
Overseas entities wishing to buy or take a lease of UK real estate
Any overseas entity considering purchasing or leasing UK property should consider and comply with the registration obligations in good time as the analysis of some corporate structures to determine beneficial ownership and the details to be supplied to Companies House may not be straightforward.
Parties dealing with overseas entities
One practical consequence of the Register will be that any well advised party to a transaction involving UK real estate being leased, charged or transferred by or to an overseas entity will need to consider any risk that the transaction might complete after the registration duties come into force. If necessary, they will wish to negotiate contractual provisions to protect themselves from the consequence of any failure by the overseas entity to perform its duties in relation to the Register or to complete its annual return if that falls due between exchange of contracts and completion. It may be appropriate to retain a right to rescind the contract if the overseas entity’s failure to comply would mean the buyer’s interest could not be registered at the relevant UK land registry. In England & Wales a buyer or tenant will not obtain legal title without registration. It is uncertain how options already granted by an overseas entity but exercised after the Act comes into force will be affected if the overseas entity has not complied with its registration duties at completion.
The exact scope of the reporting process is still unclear as the detail of how the Register will be run has not yet been released, nor is it known quite how the UK land registries’ processes will alter to deal with the Act when implemented. Subject to that, we would be more than happy to assist with any queries concerning the impact of the Act on recent or anticipated UK land transactions.
If you or your client would like further guidance please contact Richard Clark or Rose Higgins.
A more detailed note aimed at the impact of the duty to register on trusts and trust structures can be found here.