The new beneficial ownership register for overseas entities Implications for real estate

Overview

• In order to achieve greater transparency of overseas ownership of UK real estate the Government is introducing the Register of Overseas Entities (the OE Register).
• Where the overseas entity owns land in the UK it will need apply to be registered on the OE Register and provide details about those persons who exercise significant control over the entity. This will include beneficial owners who hold more than 25% of the shares or voting rights (see definition in box below).
• The OE Register will be open to public inspection and overseas entities will also be required to update the information on the OE Register annually.
• The Economic Crime (Transparency and Enforcement) Act 2022 was enacted on 15 March 2022 and deals with the setting up and operation of the OE Register.
• However the operative provisions are not yet in force and the commencement date is not yet known. It will be such future date as the Secretary of State may appoint by regulations.
• The OE Register applies to land across the UK but this briefing only covers the provisions as they apply to land in England and Wales Different rules apply to land in Scotland and Northern Ireland.
• Overseas entities must apply to be added to the OE Register if they hold a qualifying estate in land in England and Wales which was acquired on or after 1 January 1999.
• A qualifying estate means a freehold or lease granted for more than 7 years.

Key points

The Act defines an overseas entity as any legal entity which is governed by the law of a non-UK country or territory. This covers a corporate body, partnership or other entity that has a legal personality under the law by which it is governed. As a result a non UK trust will usually fall outside this regime as it has no legal personality.

However a non UK trust may be required to register with the UK Government Trust Registration Service (the TRS Register). However, the TRS Register is not open to public inspection.

Companies House will verify the information provided by the overseas entity and once verified the overseas entity will be issued with a unique identification code (ID). Without this ID the overseas entity will not be able to make an application to HM Land Registry to register itself as the legal owner of land in the UK.

Restrictions on land disposals

Overseas entities which have acquired a qualifying estate in land in England and Wales on or after 1 January 1999 will be restricted from making a relevant disposal of that land (a transfer, a lease for more than 7 years or the grant of a legal charge) unless the overseas entity has registered its beneficial ownership on the OE Register and is compliant with its updating obligations.

HM Land Registry is required to place a restriction on the title register for the property which prevents the registration of a relevant disposal unless the overseas entity has a valid ID or the disposal of the property is exempt. Broadly speaking, an exempt disposal is one that is made pursuant to a statutory obligation or court order, by the exercise of a power of sale by a mortgagee, or pursuant to a contract made before the title restriction was placed on the title register.

Penalties for non-compliance

Failure to comply with the OE Register obligations and restrictions of disposing on land can result in criminal liability for the overseas entity and its officers. In particular an offence is committed if the overseas entity makes a registrable disposition of a qualifying estate in breach of the terms of the restriction placed on the title register by HM Land Registry.

A breach can give rise to financial penalties (including a daily default rate of up to £2,500 a day) and up to five years in prison.

Transitional provisions

Overseas entities which have acquired a qualifying estate in land in England and Wales on or after 1 January 1999 will have 6 months from the date the legislation comes into force to comply with the registration and disclosure obligations under the Act. During the transitional period the overseas entity will not be caught by any restriction placed on the title register by HM Land Registry.

However, in order to catch land disposals by overseas entities before the legislation comes fully into force there are further transitional provisions which require overseas entities to disclose any disposal of a relevant interest in land between 28 February 2022 and the end of the transitional period. Before the expiry of the transitional period the overseas entity must disclose the land disposal and provide details of who the beneficial owners were immediately before the date of the disposal. These obligations apply whether or not the overseas entity retains any UK land at the end of the transitional period.

Implications for land held by a nominee

The OE Register targets corporate entities and their beneficial owners. The Government states that the purpose of the legislation is to increase transparency of overseas ownership of UK land. However this may not necessarily be the outcome where the land is held by a non-UK trust or a nominee.

An overseas corporate nominee which owns land as nominee for X will only be required to disclose any registrable beneficial owners of the nominee entity and will not need to disclose the identity of the beneficial owner of the land (i.e. X) on the OE Register except in circumstances where X exercises significant control over the nominee. If the arrangement is a bare trust then it may be necessary for the trust to be registered on the TRS Register.

Action points

• Overseas entities that hold UK land should begin auditing their UK land holdings and assess what information they may need to obtain in order to make an application to Companies House for registration on the OE Register.
• If an overseas entity has made a relevant disposal since 28 February 2022 it is likely that it will be required to disclose that disposal and the details of any registrable beneficial owners of the entity immediately before the disposal pursuant to the transitional provisions under the Act.
• When contracting with an overseas entity in relation to a disposal or acquisition of land or a financing transaction which involves security over land then additional due diligence will be required. A counterparty will no doubt also require contractual protection to ensure the overseas entity is compliant with its obligations in relation to the OE Register and that it remains compliant in view of the ongoing annual updating requirements. The counterparty may also want to include a termination right or event of default should the Overseas Entity fail to comply at any point during the life of the contract.
• Check the registered title for the land interest held by the overseas entity for any restriction on disposal of the land interest and assess whether that restriction will "bite" or whether the disposal will qualify as an exempt disposal – for example where the disposal is made pursuant to a contract entered into before the restriction was entered on the title register.