Overseas entities owning UK real estate: New register of overseas entities

Background

Last month, Daniel Abrahams noted in his opinion piece the introduction of the ‘Register of Overseas Entities’ by the Economic Crime (Transparency and Enforcement) Act 2022 (“Act”). The Register of Overseas Entities is designed to increase transparency of ownership of UK land by overseas entities. While the genesis of the Act can be traced back to 2016, when the then Prime Minister, David Cameron, gave a warning to foreign companies in an anti-corruption summit that they would be required to disclose the beneficial ownership of UK property, it was the invasion of Ukraine by Russia which triggered its acceleration into law. Transparency is paramount today.

The Act is not without criticism and the UK Government remains under pressure to crack down further on money laundering involving UK property (e.g., the ‘London Laundromat’). Further targeted changes are likely in the future.

Why does this matter?

To legally buy, sell and/or finance UK properties, overseas entities must comply with the new registration regime. It may also be relevant to internal group restructurings – e.g., any future transfer of UK property by or to an overseas group entity or the grant of a legal charge over UK property in connection with any group financing arrangements.

Failure to comply will prevent the registration of transactions with the Land Registry and may result in fines and/or the commission of criminal offences.

The new rules

Overseas entities (see below) owning a qualifying estate in land (see below), whether commercial or residential, will need to register with Companies House, unless exempt. Such overseas entities are required to take reasonable steps to identify and provide details of their registrable beneficial owners.

A ‘beneficial owner’ can be an individual, a legal entity or a government or public authority. The Act provides that a person (X) is a beneficial owner of an overseas entity or other legal entity (Y) if one or more of the following conditions are met:

• Condition 1: X holds, directly or indirectly, more than 25% of the shares in Y.
• Condition 2: X holds, directly or indirectly, more than 25% of the voting rights in Y.
• Condition 3: X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of Y.
• Condition 4: X has the right to exercise, or exercises, significant influence, or control over Y.
• Condition 5: (a) the trustees of a trust, or the members of a partnership, unincorporated association or other entity, that is not a legal person under the law by which it is governed meet any of the conditions specified above (in their capacity as such) in relation to Y; and (b) X has the right to exercise, or actually exercises, significant influence or control over the activities of that trust or entity.

Once registered, overseas entities will receive an ‘overseas entity ID” from Companies House.

The information registered at Companies House must be updated annually.

What is an overseas entity?

An ‘overseas entity’ is defined as any legal entity that is governed by the law of a country or territory outside of the UK (this is not limited to the more obvious “offshore jurisdictions” such as BVI, Cayman Islands and the Channel Islands, it applies to any non-UK territory, including the U.S.A. and EU countries). This covers bodies corporate, partnerships and any other entity that has a legal personality under the law by which it is governed.

A separate registration regime applies to non-UK resident trusts and such trusts that acquire UK land after 6 October 2020 are required to register with the Trust Registration Service.

Unincorporated trusts will not be considered ‘overseas entities’, as they do not have a separate legal personality like a company or other body corporate, however those that hold UK property indirectly through an overseas entity will be caught under the Act.

What is a ‘qualifying estate in land’ and when is registration required?

The new rules have retrospective effect, applying to any overseas entity that has acquired property in England and Wales since 1999 and holds a qualifying estate in land. A ‘qualifying estate’ means a freehold or lease granted for more than seven years. Following a six-month transition period, overseas entities will need to have been entered on the register or be subject to a pending application. In addition, any overseas entity that sells property between 28 February 2022 and the end of the transitional period must, if it is not exempt, have registered or applied for registration as an overseas entity by the end of the transitional period and made the relevant declarations about its beneficial ownership and the sale.

New land registration requirements will see restrictions being placed on titles owned by overseas entities that will stop transactions being registered where an overseas entity is in breach of the Act.

What will happen in the case of non-compliance?

If an overseas entity fails to comply with the new rules, it will effectively be prevented from dealing in land – whether buying, selling, or financing.

In addition, there are potential criminal offences under the Act for the overseas entity and for its officers (such as directors), including for failing to register, failing to take reasonable steps to identify beneficial owners, providing false information and failing to update the register. Potential punishments range from fines to imprisonment for up to 5 years (for individuals).

Practical points to consider

Overseas entities holding UK property should:

• Audit their holdings.
• Assess the information which they may need to obtain to make an application to Companies House for registration (including in respect of any sales made since 28 February 2022). It would be advisable to apply for registration as soon as possible after the register opens, and not wait until the end of the six-month transitional period.
• To the extent that it has not already done so, take steps to identify its beneficial owners. This may take time in complex structures.
• Be aware that, on transactions, there will likely be more emphasis and focus on beneficial ownership and registrations, not only in relation to the increased level of due diligence that will be undertaken but also in relation to the contractual protections which parties may seek (e.g., warranties, conditions precedent and information undertakings).

Example scenarios

We set out below some scenarios to illustrate the impact of the new regime.

Example 1 – Luxembourg SARL wishes to buy UK freehold

A Luxembourg SARL wishes to acquire UK freehold (perhaps a residential property in West London).  That company is owned by a Cayman company.  The Cayman company is owned by two individuals: Person X holds 85% of the shares and Person Y owns 15% of the shares.  The Luxembourg SARL would need to register before it could complete the acquisition.  Person X would be registrable under Conditions 1 and 2.  Person Y would not be registrable.

Example 2 – Existing freehold owned by a BVI company with no beneficial owners

A BVI company owns UK freehold (perhaps an office building in the City of London).  No person holds, directly or indirectly, more than 25% of the shares or voting rights in the company.  The BVI company would need to register, however, there are no registrable beneficial owners.

Example 3 – Sale of land during the 6-month transitional period by Cypriot real estate investor

A Cypriot company acquired UK freehold in 2012 (perhaps a then newly built care home in Surrey).  The Cypriot company would need to register during the six-month transitional period.

If the Cypriot company were to sell the UK freehold prior to the end of the six-month transitional period, it would still need to register, even though it no longer holds a qualifying estate in land at the end of the transitional period.

Example 4 – Non-UK/US subsidiaries with long-term leasehold interest

A US company has acquired a group of companies headed by another US company.  The group acquired includes a non-US and non-UK subsidiary which holds a long-term UK lease.  Even if that lease is to remain vested in that subsidiary for a limited time following the acquisition, the US buyer needs to be mindful that, in addition to the consequences of the overseas subsidiary failing to register, this may impact any future transfer of the property (whether to a third party at arm’s length or as part of an internal group restructuring) or the grant of a legal charge over the property in connection with any group financing arrangements.

Example 5 – Development joint venture with real estate to be owned by overseas entities

A funder and a developer are establishing a joint venture for a series of brownfield residential developments in Bristol.  For various reasons (including tax), the real estate will be owned by site-specific overseas companies (perhaps the BVI).  Such companies will be owned by the funder (90%) and the developer (10%).  The parties agree that the joint venture agreement will include contractual provisions to deal with the registration of such companies and to ensure that such companies comply with their obligations to update Companies House annually.

Contact us

Should you have any questions, please contact one or more of the authors, or your usual Memery Crystal contact. We can help you to audit your ownership of UK real estate, identify any registrable beneficial owners and navigate the registration process (as soon as it comes into force).