The Economic Crime (Transparency and Enforcement) Act 2022 (the “Act”) came into force on 1 August 2022. The Act is aimed at improving the UK’s financial transparency and anti-corruption measures concerning overseas structures owning land in England and Wales (here the “UK”) and was expedited following Russia’s invasion of Ukraine early this year.
One implication of the Act was the introduction into the UK real estate market of the concept of the register of overseas entities (the “ROE”). The ROE is maintained by Companies House and is publicly available. For those working in the corporate real estate industry, this has significant implications for overseas entities which hold, or are investing into, real estate in the UK, as the fundamental purpose behind the Act is to require owners of interests in UK land to be transparent about the identities in their ownership structure, with potentially severe repercussions if the Act is not complied with.
The purpose of this briefing is to highlight key practical implications for affected dispositions of land (including holdings of such land) in the UK.
- The Act applies to all legal entities (including partnerships) incorporated outside the UK which own, dispose of or acquire UK land, grant a registrable lease for a term of more than seven years or grant a charge over such land. Such entities will now need to register themselves on the ROE, as well as submit an annual update.
- The ROE is maintained by Companies House and allocates each registered overseas entity a unique ID number. Whilst the concept of the ROE is based on the people with significant control (PSC) register (which applies to UK entities needing to disclose those who exercise significant influence or control over them), the ROE has a higher threshold with a requirement that the information is verified by a UK regulated agent. Nominating the agent and gathering the relevant information could cause delays in the process.
- Existing owners of land (acquired since 1 January 1999 in England and Wales and from 2014 in Scotland) are required to be registered as an overseas entity no later than expiry of the transitional period on 31 January 2023, even where no disposition of that land is proposed.
- From 5 September 2022, a restriction was added to each existing and new registered title of UK land owned by an overseas entity (of which there are over 31,000 in the UK), to ensure compliance with the Act's requirements. These include an obligation to annually update the ROE as verified by a UK regulated agent.
- The land registration elements of the Act came into force on 5 September 2022 and from this date, it is a criminal offence for an overseas entity to acquire and subsequently deal with by UK land disposal, or grant a registrable lease of more than seven years or a charge over it, unless the owner has registered as an overseas entity. This date is extended to 31 January 2023 in the case of existing owners.
- From 5 September 2022, in addition to the restriction on relevant disposals above, all overseas entities which acquire a freehold or registrable lease of more than 7 years need to be registered at Companies House prior to submitting their HM Land Registry application. Failure to do so will result in HM Land Registry rejecting the application to register the disposition along with the potential for civil (daily penalties) and criminal sanctions.
- Crucially, the Act is retrospective in that it captures relevant disposals since 28 February 2022, even if the overseas entity no longer has an interest in the land.
- Civil and criminal sanctions can be imposed for failure to comply with the Act in terms of both initial registration and annual updating. These can extend to managing officers of the overseas entity in certain circumstances.
Practical steps to take to comply with the Act
- Overseas entities are advised to be proactive and not wait to be contacted by HM Land Registry or Companies House, especially given the anticipated rush to register by the 31 January 2023 deadline for existing land owners.
- Overseas entities must appoint an approved independent UK-based agent who is regulated by the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 to certify the information on the ROE. There will be an additional cost element for this process, as well as for the annual updates which are required to be carried out by a regulated agent.
- Any lender will require an overseas borrower entity granting a legal charge to be secured on UK qualifying real estate to be registered on the ROE at the date of the legal mortgage, especially as registration of the charge is compromised without it.
- In-house attorneys will not be able to conduct verification on the overseas entity which employs them and many law firms are expected to be unwilling or unable to conduct ROE verification for a number of reasons including (i) availability of appropriately experienced and relevant overseas entity jurisdiction competent advisers, (ii) knowledge of the structure and nature of ownership, (iii) availability of reliable and independent sources of information and (iv) inability to verify accuracy of facts.
- The information on the ROE needs to be updated on an annual basis and failure to update is subject to a financial penalty of up to £2,500 per day or up to five years in prison.
The Verification Process
The verification process comprises five elements:
1. legal and factual analysis as to who (if anyone) is a registrable beneficial owner, a registrable managing officer or a registrable trust;
2. if there are any registrable beneficial owners, a legal and factual analysis as to the nature of each beneficial owner’s control;
3. identity verification;
4. submitting the confirmation of verification at Companies House;
5. Companies House accepting registration of the overseas entity.
- The overseas entity applying for registration will have to either identify any registrable beneficial owners of the entity or confirm that it has none.
- Broadly, a registrable beneficial owner is a person directly or indirectly holding 25% or more of the shares or voting rights of the overseas entity or who otherwise has the right to exercise or actually exercises significant influence and control over it.
- Where the registrable beneficial owner is a trustee of a trust (which includes any arrangements outside the UK that are of a similar character to a trust), the information provided as part of the registration must include detail as to the identity and location of each beneficiary, settlor or grantor of the trust.
- Where you hold or intend to acquire UK land through an overseas entity, appoint a regulated agent to initially verify and then deal with the annual updating requirements to avoid financial penalties, or worse, criminal sanctions.
- Ensure the correct enquiries are being raised in due diligence processes by updating your UK transaction due diligence questionnaires. For those selling, granting leases of more than seven years or charges, ensure you have taken the necessary steps prior to entering into a transaction to limit the delays in complying with the Act.
- Ensure your UK transaction post-completion checklist addresses the necessary steps and registrations to be made to comply with the Act.