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Owning UK land using foreign companies - time to act

  • United Kingdom
  • Banking and finance
  • Commercial agreements
  • Corporate
  • Real estate

29-07-2022

What is happening?

On 1 August, the Register of Overseas Entities (“ROE”) introduced by the Economic Crime (Transparency and Enforcement) Act 2022 (“ECTEA”) is anticipated to go live. 

Why is this relevant?

From 5 September 2022 – an overseas entity (“OE”) must first be registered on the ROE in order to apply to HM Land Registry to be registered as an owner of a qualifying estate in land.

By 31 January 2023 – an OE must be registered on the ROE if it holds a qualifying estate and became registered as proprietor of that qualifying estate on or after 1 January 1999.

From 1 February 2023 – if an OE is not registered on the ROE it will not be able to transfer or charge any qualifying estate it owns, nor grant leases for a term of over seven years (subject to narrow exceptions – see below).

In England and Wales a “qualifying estate” in land is a freehold or a lease granted for a term of over seven years.

There are criminal sanctions for non-compliance.

What happens next?

Most OEs that own a qualifying estate in land in England and Wales will need to make an application to be registered on the ROE. The law is new and the application process is complicated, so OEs should begin thinking about the application process and collating the information they need to make that application as soon as possible. 

What is an OE and what is the ROE?

An OE is a legal entity governed by the law of a country or territory outside of the United Kingdom. An entity incorporated in Jersey, Guernsey or the Isle of Man falls within the definition of an OE for the purposes of the ECTEA. 

The ROE will be a register of beneficial ownership for any OE that owns a qualifying estate. 

The ROE is to be administered by Companies House and, subject to certain exceptions, the information on it will be publicly available.

We initially reported on the corporate, property and finance aspects of the ECTEA and the ROE in March, shortly after the ECTEA was given Royal assent. A link to our original corporate and property update is here. A link to our original finance update is here.

The impact of the ROE on OEs

In broad terms:

From 5 September 2022 – an OE must first be registered on the ROE in order to apply to HM Land Registry to be registered as an owner of a qualifying estate. 

This means that an OE that is presently looking to buy or take a long lease of land must apply to Companies House to be registered on the ROE at the earliest possible opportunity. It is unlikely that any seller would agree to complete a sale of land on or after 5 September 2022 to an OE which isn’t registered on the ROE.

By 31 January 2023 – an OE must be registered on the ROE if it holds a qualifying estate and became registered as proprietor of that qualifying estate on or after 1 January 1999, or face criminal sanctions. An OE which held a qualifying estate on 28 February 2022 but which sells before 31 January 2023, will still have to submit to Companies House the same information as would be required for an application to be registered on the ROE – albeit that information will not be published on the ROE.

From 1 February 2023 – if an OE is not registered on the ROE it will not be able to transfer or charge any qualifying estate it owns, nor grant leases for a term of over seven years (subject to narrow exceptions such as transactions required by court order or statutory obligation or transactions pursuant to certain prior contracts). It would be a criminal offence for an OE, not registered on the ROE, to make any such prohibited disposition after 31 January 2023.

The transitional period up to 31 January 2023 is only in respect of qualifying estates already owned by OEs by 5 September 2022. If the OE acquires a qualifying estate during the transitional period the restrictions on relevant dispositions will apply immediately.

Implications for real estate finance

From 5 September 2022, unless an OE borrower already owns the land, it is unlikely that a lender will advance facilities to be secured on land in England and Wales without evidence that the OE is registered on the ROE. This is because the lender will be unable to register its legal charge unless and until the OE is registered at HM Land Registry as the owner of the relevant qualifying estate.

As from 1 February 2023 evidence that the OE is registered on the ROE will be required in order to register a legal charge at HM Land Registry over any land in England and Wales owned by an OE. This means that after 31 January 2023, lenders are unlikely to advance facilities to any OE without evidence that the OE is registered on the ROE.

For transactions being entered into close to those key dates, the borrower and lender should engage in early discussions about what is required for completion.

Although facility agreements usually contain obligations relating to compliance with laws, those obligations are often qualified by material adverse effect. We therefore expect that lenders will expressly address the ROE where they are financing and/or taking security over UK real estate owned by an OE. There is currently no market standard drafting for this so an OE may see a representation, covenant, condition precedent / subsequent or event of default or a combination of those provisions. Lenders are likely to ask for ongoing compliance obligations given the updating / re-stating obligation referred to below.

How to apply to be registered on the ROE

As part of the Companies House application to register on the ROE, an OE must provide certain details about itself and its registrable beneficial owner(s) (“RBOs”). Where there are no RBOs, details of managing officers must be provided. There are also additional disclosure requirements in relation to trusts and trustees. Information must also be provided about any relevant dispositions (in England and Wales those are transfers, leases granted for a term of over seven years or charges) of qualifying estates made since 28 February 2022 up to the date of the application to Companies House.

Once registered on the ROE the OE will be given an overseas entity identification number. That number will need to be supplied to HM Land Registry if an OE wishes to be registered as owner of a qualifying estate or if the OE makes certain dispositions relating to a qualifying estate.

The OE must update or re-state the information held on the ROE once a year.

What is an RBO?

An RBO may be:

  • an individual which (i) is not exempt from being registered; and (ii) meets any of the conditions set out in Table 1 below (the “Conditions”);
  • a legal entity (other than a government or public authority) which (i) is not exempt from being registered; (ii) meets any of the Conditions and (iii) is subject to its own disclosure requirements[1]; or
  • a government or public authority.

Taking reasonable steps to identify RBOs

Section 12 of the ECTEA requires an OE to take “reasonable steps” to identify their RBOs and obtain the required information about them. This includes a requirement to give notice to any person that the OE knows or has reasonable cause to believe is an RBO (with the aim of obtaining confirmation of their RBO status and gathering the relevant information on that RBO required as part of the application process) (a “Section 12 Notice”). A recipient of a Section 12 Notice has one month from the date of the notice to comply with it (though can respond sooner). 

Whilst it will not be possible to formally serve a Section 12 Notice under the relevant sections of the ECTEA until those provisions are in force; practically, such discussions can start informally and we would suggest these are initiated as soon as possible and that RBOs are encouraged to respond quickly.

Verification of information

The information to be supplied as part of the application for registration on the ROE will need to be independently verified in accordance with the terms of the ECTEA and related regulations. This includes verifying which of the Conditions an RBO satisfies in relation to an OE and why, together with the date on which the RBO became an RBO. 

Only a limited number of people, acting in the course of business carried on in the UK, will be able to verify that information. At the moment, it is not clear whether UK law firms will be offering this verification service in practice. Further guidance is awaited and risk analysis is ongoing.

What OEs should be doing now

OEs should, as soon as possible:

  • for each OE, analyse which individuals or entities might fall within the definition of RBO;
  • talk to any individual or entity which has been identified as part of the analysis above - as a precursor to sending each of them a Section 12 Notice;
  • collate the information on the OE and its RBOs which must be submitted as part of an application for registration on the ROE;
  • collate the information about any relevant dispositions which must be submitted as part of an application for registration on the ROE.

The application process and information gathering will take time. Start as soon as possible so that the application to register on the ROE can be submitted to Companies House. If you require any guidance on this process we are here to help.

Table 1 – Conditions to be an RBO

Condition 1

Direct or indirect ownership of 25% of shares in the OE.

Condition 2

Direct or indirect holding of more than 25% of the voting rights in the OE.

Condition 3

Direct or indirect right to appoint or remove a majority of the board of directors of the OE.

Condition 4

The right to exercise, or actually exercises, significant influence or control over the OE.

Condition 5

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 conditions 1-4 in relation to the OE and the RBO has the right to exercise or actually exercises significant influence of control over the activities of the trust or entity.

[1] Legal entities subject to their own disclosure requirements include, broadly, (a) legal entities to which Part 21A Companies Act 2006 applies (otherwise known as the UK persons with significant control regime (“PSC Regime”)); (b) companies with voting shares traded in UK or EU regulated markets; or (c) professional trust companies regulated in their territory of incorporation.