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Executive Summary: the 30-second brief
The enactment of the Economic Crime (Transparency and
Enforcement) Act 2022 means that clients will need to review their
property portfolio. Where overseas entities are the registered
owners of UK property, information on such overseas entities and
their beneficial owners will need to be disclosed on a new
Companies House register. A failure to make the relevant
disclosures carries the risk of a criminal conviction (for both the
overseas entity and its officers) as well as restrictions on
dealing with such UK property.
Introduction
Although the UK Government has long proposed a register of
foreign owners of UK property, the recent invasion of Ukraine
– and the consequent desire to ensure “dirty money”
has nowhere to hide in the UK – has accelerated its
introduction. Following an expedited passage through Parliament,
the Economic Crime (Transparency and Enforcement) Act 2022 (the
“ECA“) received royal assent on 15 March
2022. The ECA contains provisions in relation to sanctions,
unexplained wealth orders, and, most notably for the commercial
real estate industry, the introduction of a register at Companies
House of overseas entities that own UK property along with their
Registrable Beneficial Owners (as defined below) (the
“Register“).
With a significant proportion of UK commercial property held by
overseas entities, the new requirements are likely to affect many
participants in the UK real estate sector, including those with no
connection to Russia or Ukraine. In this note, we have set out a
summary of some of the key implications for any overseas owner of
UK property.
Who has to register and by when?
An entity (a “Relevant Overseas
Entity“) will have to apply to join the Register if
it:
- is (i) governed by the law of a country other than the UK; and
(ii) a legal person under such law (an “Overseas
Entity“); and - became the registered proprietor of either (i) a UK freehold
title; or (ii) a leasehold title of longer than seven years, in
each case on or after 1 January 1999 and also still held such
estate on or after 28 February 2022 (a “Qualifying
Estate“).
The regulations that bring the Register into force have not yet
been enacted, but when they are and the Register does come into
existence, a six-month transition period (the
“Transition Period“) will follow.
What must be disclosed on the Register?
A Relevant Overseas Entity must disclose (among other things)
its name, country of incorporation, and address for service.
It also needs to disclose any natural person or government (a
“Registrable Beneficial Owner“) that
fulfils any of the following beneficial ownership criteria (the
“Beneficial Ownership Criteria“):
- holding directly or indirectly more than 25% of the votes or
shares in the Relevant Overseas Entity; - having the right directly or indirectly to appoint or remove a
majority of the Relevant Overseas Entity’s board; or - having the right to exercise or actually exercising significant
influence or control over the Relevant Overseas
Entity.1
To the extent that any company or another legal person (also a
“Registrable Beneficial Owner“):
- fulfils the Beneficial Ownership Criteria; and
- is subject to its own disclosure requirements under the ECA or
the Companies Act 2006 (e.g., the persons with significant control
(“PSC”) regime),
then such company/legal entity should be listed as the
Registrable Beneficial Owner and the Relevant Overseas Entity need
not look further up the chain.
The information to be disclosed in respect of a Registrable
Beneficial Owner includes their name, date of birth, nationality,
registration number, and residential address/principal office.
Where the Registrable Beneficial Owner is a trustee, this fact
will also have to be disclosed along with (among other things) the
name of the trust and certain information in respect of the other
trustees and the beneficiaries of the trust. Matters disclosed in
relation to such trusts will not be publicly available. Rather
strangely, it does not appear that information in relation to the
underlying trust or its beneficiaries needs to be disclosed where
the Relevant Overseas Entity is itself a trustee.
Consequences of not registering
The UK Government has introduced a range of criminal and
practical consequences for Relevant Overseas Entities that fail to
satisfy their registration obligations.
Criminal offence
All Relevant Overseas Entities will have to apply to the
Register by the end of the Transition Period. Failing to do so will
result in such Relevant Overseas Entities and each of its
officers committing a criminal offence. If found guilty,
they could be liable to a prison term of up to two years, or a
fine, or both.
Land Registry Consequences
Following the end of the Transition Period:
- where a Relevant Overseas Entity has not applied to the
Register, the Land Registry will (subject to the exceptions below)
be obliged to enter a restriction on any disposition of an estate
held by the same; and - if an Overseas Entity is entitled to become the registered
proprietor of a Qualifying Estate and is not entered in the
Register, the Land Registry, subject to the exceptions below, must
not register the relevant disposition.
The ECA provides limited exceptions to these obligations
including where:
- the contract in relation to the disposition was entered into
before (as applicable): (i) a restriction was entered on the
register; or (ii) the Overseas Entity in question became entitled
to be registered; or - the disposition: (i) relates to the power of sale/leasing
conferred on the proprietor of a registered charge; or (ii) is to
be made by an insolvency practitioner.
Ongoing legal obligations
Once a Relevant Overseas Entity has registered, it will be
required annually to update the information held on the Register or
confirm there are no updates, failing which the Relevant Overseas
Entity and its officers are liable for a fine.
Where a Relevant Overseas Entity disposes of its UK property, it
can apply to be removed from the Register and ongoing obligations
under the ECA will cease.
FAQs
Will there be a requirement to register the historic
beneficial owners of a Relevant Overseas Entity?
A Relevant Overseas Entity that disposes of its Qualifying
Estate on or after 28 February 2022 will have to disclose its
Registrable Beneficial Owners (and any applicable information in
relation to any trust of such Registrable Beneficial Owners), as at
the moment immediately before such disposal. Such Relevant Overseas
Entities will have to apply to the Register by the end of the
Transition Period. To this extent, certain Relevant Overseas
Entities will have to register their historic beneficial
owners.
Where a Relevant Overseas Entity holds its Qualifying Estate
during (and beyond) the Transition Period or becomes entitled to
hold a Qualifying Estate after the Transition Period, it will have
to disclose its Registrable Beneficial Owners as at the date of the
application.
What happens if a Relevant Overseas Entity cannot identify
its Registrable Beneficial Owners?
The ECA provides that, where a Relevant Overseas Entity cannot
identify all or any of its Registrable Beneficial Owners, it should
disclose its managing officers in the Register. This could arise in
certain trust structures, for example, where an overseas trustee
company is an “orphan entity” and holds a Qualifying
Estate on trust.
Concluding remarks
Whilst the obligations on Relevant Overseas Entities are not yet
in force, the additional compliance burdens for such entities are
already relevant: if a Relevant Overseas Entity owned a Qualifying
Estate on or after 28 February 2022, it will in due course have to
apply to the Register. In order to avoid the severe consequences of
non-compliance, consideration should be given now to any Relevant
Overseas Entities in a portfolio to prepare for the disclosures
that will have to be made. There is a general offence if a person
submits information that is false or misleading which could lead to
a fine and/or imprisonment, so these obligations should be taken
seriously.
There are also some apparent gaps in the ECA such as those
relating to Relevant Overseas Entities that are themselves trustees
or indeed UK entities or individuals from any jurisdiction holding
Qualifying Estates on trust for overseas beneficiaries. We are sure
these will be closed in due course as the new regime is put into
effect and the implementing regulations published.
In the meantime, if you have any questions or require advice as
to how to prepare for the ECA coming into force, please get in
touch with your usual MoFo contact, and we would be happy to
assist.
William Jay, London Trainee Solicitor, contributed to the
drafting of this alert
Footnotes
1 Certain other criteria apply in respect of trusts,
limited partnerships, and other unincorporated
entities.
Because of the generality of this update, the information
provided herein may not be applicable in all situations and should
not be acted upon without specific legal advice based on particular
situations.
© Morrison & Foerster LLP. All rights reserved
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