A new transparency regime affecting property in Scotland comes into effect on 1 April 2022.
Introduction
The Land Reform (Scotland) Act 2016 (Register of Persons Holding a Controlled Interest in Land) Regulations 2021 (the 2021 Regulations) come into force on 1 April 2022. The 2021 Regulations can be viewed via this link.
The policy intention behind the 2021 Regulations is to increase public transparency in relation to persons who have control over decision-making in relation to land in Scotland.
Subject to some important exemptions and exceptions (details of which are set out below), the 2021 Regulations will oblige owners or tenants (under registered long leases of over 20 years) to enter (in a new public register) information about themselves, the property, and the identity of persons who, though not holding legal title, have power to exercise significant influence or control over what happens to the property.
The new public register will be operated by Registers of Scotland and will be known as the Register of Persons Holding a Controlled Interest in Land (RCI). The 2021 Regulations refer to:
- owners/tenants holding legal title as recorded persons and
- persons with significant influence or control over decision making as associates.
The 2021 Regulations are fairly complex and we have summarised below the salient points:
The 2021 Regulations are intended to result in the disclosure (in the RCI) of the identity of persons who have power to exercise significant influence or control over the person (or persons) with legal title in one of the following five scenarios (specified in Parts 1-5 of Schedule 1 of the 2021 Regulations) to view please see this link:
- Part 1 (scenario 1): where legal title is held by an individual, and there exists a contractual or other arrangement with another person which gives that person influence or control over significant decisions in relation to the land;
- Part 2 (scenario 2): where legal title is held by or on behalf of a partnership (Note: Limited Liability Partnerships, Scottish Limited Partnerships, and Scottish partnerships where all the partners are limited companies are exempt);
- Part 3 (scenario 3): where legal title is held by trustees of a trust;
- Part 4 (scenario 4): where legal title is held on behalf of an unincorporated association; or
- Part 5 (scenario 5): where legal title is held by an overseas legal entity (Note: Overseas entities which have shares admitted to trading in a regulated market situated in an EEA state or markets listed in Schedule 1 of the Register of People with Significant Control Regulations 2016 (which includes the New York and Tokyo stock exchanges) are exempt ). To view please this link.
The criteria for what constitutes significant influence and control in relation to each of the above five scenarios is set out in Schedule 1 of the 2021 Regulations. In relation to an overseas entity, for example, Schedule 1 (to view please see this link) paragraph 12 of the 2021 Regulations states that a person would be classed as an “associate” of an overseas entity if they directly or indirectly hold more than 25% of the voting rights in the overseas entity, or directly or indirectly hold the power to appoint or remove a majority of the board of directors (or equivalent management body).
Duties under the Regulations
Recorded persons and associates
The primary duty under the 2021 Regulations falls upon “recorded persons”. The recorded person is obliged (under regulation 10) to verify with the associate certain required information (including identity and contact details) relating to that “associate”, and to then enter the relevant information in the RCI. This process has to be completed within 60 days of the event which resulted in the recorded person/associate relationship coming into being. An example of such an event would be the submission of the recorded person’s application to the Land Register to register title, after purchasing the property.
Associates also have duties under the 2021 Regulations. These are set out in regulations 13 and 14, and include providing required information about themselves, if requested (by a recorded person), or on their own initiative (if they haven’t been asked for such information by a recorded person within 67 days of becoming an associate of that recorded person).
Off-register events can result in an obligation to record information in the RCI
A requirement under the 2021 Regulations to record details in the RCI is not only triggered when someone acquires title to a property (or long lease). It can also be triggered by an event which doesn’t change who owns or leases property, but which leads to someone becoming classed as an associate of the registered holder of title.
For example, if an event led to a person directly or indirectly holding more than 25% of the voting rights in a (non-exempt) overseas entity which owns property in Scotland, that would result in a requirement to record information about that person in the RCI, as that person would now be an “associate” of the overseas entity (ie. recorded person).
Another example (within the unincorporated associations scenario 4 listed above) might be where title to the clubhouse and courts of a tennis club is held in the name of trustees on the club’s behalf. The trustees would be “recorded persons” for the purposes of the RCI, and the existing chairperson and treasurer of the governing committee of the club would be classed as associates. If a new chairperson and treasurer were elected to the governing committee, there would then be a duty to record the required information on the new chairperson and treasurer (as associates of the trustees who hold title) in the RCI.
Both recorded persons and “associates” have duties to update the RCI (or provide information to enable its updating) if circumstances change which make the existing information in the RCI inaccurate.
The duty to record information in the RCI applies in relation to existing property interests from 1 April 2022>
The obligations under the 2021 Regulations to record information in the RCI apply (from 1 April 2022) in relation to existing property ownership and registered leases (as well as to property interests acquired after that date). Non-exempt categories of property owners (or tenants) should consider whether (in relation to their existing property holdings) there are any parties who could fall within the definition of associates, and if so, record relevant information in the RCI.
Likewise, persons who could fall within the definition of associate (by virtue of having significant control or influence over the decision making of holders of legal title to any properties or long leases (ie. recorded persons)) as at 1 April 2022, should consider whether the 2021 Regulations apply to their circumstances, and if necessary, provide the recorded persons with the information required for the RCI.
Penalties for failure to comply and one year grace period
A person who fails to comply with the 2021 Regulations without reasonable excuse can be fined up to £5000. There is, however (under regulation 26(2) of the 2021 Regulations), a one-year transitional grace period beginning on 1 April 2022 and ending on 1 April 2023 during which the offence provisions in the 2021 Regulations are suspended, meaning that failure to comply with the 2021 Regulations will not incur a fine.
Exceptions and exemptions
The 2021 Regulations include some important exceptions and exemptions. These should kept in mind before giving thought to whether, in any given set of circumstances, a duty might arise to record information in the RCI.
Exemptions
The exemptions (set out in Schedule 2 of the 2021 Regulations, to view please see this link) list various types of entity which are already subject to transparency regimes (such as the Persons of Significant Control Register operated by Companies House) and are therefore exempt from being classed as a recorded person” under the 2021 Regulations.
If the holder of legal title to a property is exempt from being a “recorded person”, there can be no obligations (for “recorded persons or associates) under the RCI in relation to that property holding. It is, however, still possible for an entity which falls within the exemptions to be an associate of a (non-exempt) recorded person.
Types of entity which are exempt from being recorded persons under the Regulations include UK-registered companies, Limited Liability Partnerships, Scottish Limited Partnerships.
As mentioned above, certain types of overseas entity are also exempt. These are overseas entities which have shares admitted to trading on a regulated market which is situated in an EEA state, or a market listed in Schedule 1 (to view please use this link) of the Register of People with Significant Control Regulations 2016 (which includes the New York and Tokyo stock exchanges).
Exceptions
The exceptions (set out in Schedule 1 (to view please use this link) of the 2021 Regulations for each of the five scenarios mentioned above) are based on the nature of the relationship between recorded persons and other parties who might (otherwise) be classed as an associate.
Exceptions – paid professional advisors
An exception which is common to all five scenarios is that a person cannot be an associate of a recorded person simply by virtue of being a paid professional advisor to the recorded person. The 2021 Regulations specifically mention solicitors and accountants as falling within the paid professional advisor exception, but another example could be an asset manager of an investment fund. Each situation would have to be considered on its merits but if a professional advisor’s involvement is restricted to giving advice, as opposed to exerting significant control or influence in relation to decision making relating to property, then it is likely that the exception would apply.
Exceptions – concluded contracts for the sale of land
The scope of the 2021 Regulations is potentially very wide, and even at this early stage it is possible to think of circumstances where it is not clear whether or not an exception would apply. For example, in relation to the scenario in Part 1 listed above (ie. where property is held by an individual there exists a contractual or other arrangement with another person) one of the listed exceptions is that a person is not an associate by virtue of having entered into a concluded contract (missives) with an individual for the sale of the property. Option agreements (contracts which give the option holder the right to call upon another party to sell or acquire a property in the future) are similar in effect to missives, but are not listed as an exception. So would a landowner who enters into an option agreement with another person be obliged to enter details of that person in the RCI? The answer would depend on whether the option agreement in question gave the option holder power to exercise significant control or influence over the landowner’s decision making in relation to the land, and each case would have to be considered on its own merits.
Security declarations
Individuals who would otherwise be required to have their details recorded as “associates” can make a “security declaration” to the Keeper of the Registers of Scotland under regulation 16 of the 2021 Regulations requesting that their details not to be recorded as an in the RCI for security reasons (e.g. if they would be at risk of violence if their whereabouts is disclosed). If a security declaration is made, the Keeper of the Registers of Scotland must assess the request, but can refuse it. There are appeal provisions under regulation 18.
The RCI’s relationship with the Land Register of Scotland
The RCI and the Land Register of Scotland will operate independently of one another. The Keeper of the Registers of Scotland will not require evidence of recording of information in the RCI as a condition of processing an application to register title to property or to register a lease, and failure to comply with the 2021 Regulations does not affect validity of title in the Land Register.
Overseas entities – UK-wide regime
A new regime for registering details of persons who have influence over or control overseas entities with property interests in the UK is being introduced under the Economic Crime (Transparency and Enforcement) Act 2022 Economic Crime (Transparency and Enforcement) Act 2022 (to view please use this link). The Act was first introduced to Parliament as a Bill on 1 March 2022 and received Royal Assent on 15 March 2022.
In relation to Scotland, the Act will (generally speaking) prevent the registration (in the Land Register of Scotland) of a disposition, lease, assignation of lease, or standard security granted by or in favour of an overseas entity unless that entity has registered certain specified information in the new Register of Overseas Entities. It is expected that the Register of Overseas Entities, which will be managed by Companies House, will be operational in the coming months. When that happens, it could well be the case that overseas entities will be removed from the scope of the Scottish RCI regime, as the Scottish and UK governments have previously indicated a desire to avoid duplication between the two registers.
For an analysis by our English Real Estate team of what the Economic Crime (Transparency and Enforcement) Act 2022 means for commercial real estate please see the article published via this link.
Subject to the exemptions and exceptions mentioned above, the ambit of the 2021 Regulations is potentially very wide and it seems likely that parties will be brought within their scope as associates inadvertently, particularly as a result of the type of off-register events given as examples above (such as the acquisition of additional voting rights in overseas entities, or changing of office bearers in unincorporated associations). As the 2021 Regulations are complex, the one-year transitional grace period from 1 April 2022 to 1 April 2023 is welcome and should enable greater understanding (as well as publicity) of how the new transparency regime works in practice, prior to the offence provisions coming into effect.
If you think you may be affected by the 2021 Regulations (whether as a recorded person or associate) please do not hesitate to contact us to discuss your specific circumstances.
A basic overview of the RCI is available via this link on the Registers of Scotland website. Detailed guidance is expected to be available on the website shortly.
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