A practical guide to the Register of Overseas Entities

This article was first published on 17 August 2022 and last updated on 1 February 2023. You can find a short update on some of the changes made to the Register of Overseas Entities by the Economic Crime and Corporate Transparency Act 2023 here.

Introduction

The requirement for the Registrar of Companies to maintain the Register of Overseas Entities (the Register) is created by section 3 of the Economic Crime (Transparency and Enforcement) Act 2022 (the Act). We have previously tracked the progress of the legislation on Insights and you can read some of our earlier commentary here.

This guide is intended to give some practical pointers for those who are affected by the operation of the Register. It is intended primarily for real estate investors but we also take into account the impact of the Register on real estate lenders. This guide focusses on the land registration requirements in England and Wales (restrictions on land transactions will also apply in Scotland and Northern Ireland).

Law and practice continues to evolve. Not all of the secondary legislation required by the Act is in force or has yet been drafted. As a result, this guide states the law as it applies on 1 February 2023 and we anticipate updating it when the remaining secondary legislation is published.

Recap…

Any overseas entity that owns or buys UK land will have to take reasonable steps to identify its “registrable beneficial owners” and submit details to Companies House to put on the Register.

Registered overseas entities will receive an overseas entity ID from Companies House and there will be annual updating requirements.

New land registration requirements involve restrictions being placed on freehold and leasehold titles owned by overseas entities. These will prevent transactions being registered where an overseas entity makes a disposition in breach of the legislation. Overseas entities will also need to have an overseas entity ID in order to make an application to become the registered proprietor of a freehold or leasehold estate.

Certain transitional provisions were in place during the first six months of the Register becoming operational.

Failure to comply with the Act can lead to criminal and financial penalties for overseas entities and their officers.

What is the timing?

The Register went live on 1 August 2022 but the land registration elements of the Act were staggered and did not come into force until 5 September 2022.

This staggered commencement for the land registration elements was good news for buyers of land in England and Wales who were overseas entities, who had a slightly longer period in which to obtain their Overseas Entity ID numbers before they were required to use them to apply to become a registered proprietor of a freehold or leasehold estate at the Land Registry.

Who must register?

Overseas entities that own land in the UK must register. The term “overseas entity” has been given a wide definition in the Act and means a legal entity that is governed by the law of a country or territory outside the UK.

A “legal entity” is defined as a body corporate, partnership or other entity that (in each case) is a legal person under the law by which it is governed. A “registered” overseas entity is an overseas entity the name of which appears on the Register.

What must overseas entities do?

Overseas entities must take reasonable steps to identify their “registrable beneficial owners” and obtain the categories of information about them that are specified in the Act.

The Act requires overseas entities to serve an “information notice” on any person that it knows, or has reasonable cause to believe, is a registrable beneficial owner in relation to the entity or any person who they believe will enable them to identify a beneficial owner.

The Act allows for a period of one month for a person to respond to an information notice. It is an offence for a person, without reasonable excuse, to fail to comply with such a notice, to make a statement knowing it to be false in a material particular, or recklessly to make a statement that is false in a material particular. A person found guilty of such an offence will be liable to imprisonment for a maximum term of two years or to a fine (or both).

In certain circumstances (for example, where an overseas entity cannot provide complete information about its registrable beneficial owners) information about its managing officers will be required instead.

Verification

It is necessary for the application to Companies House for registration to be “verified”. Verification must be undertaken by a “relevant person”.

That term is defined in the relevant legislation to include “credit institutions”, “financial institutions”, “auditors, insolvency practitioners, external accountants and tax advisers”, “independent legal professionals” and “trust or service company providers” amongst others.

It a criminal offence for a person, without reasonable excuse, to deliver or cause to be delivered to the Registrar any document that is misleading, false or deceptive in a material particular or to make to the Registrar any statement that is misleading, false or deceptive in a material particular.

This is one of the reasons why the Law Society cautioned against law firms undertaking verification and that role has been primarily undertaken by corporate services providers and advisers.

Who is a registrable beneficial owner?

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 is that X holds, directly or indirectly, more than 25% of the shares in Y.

• Condition 2 is that X holds, directly or indirectly, more than 25% of the voting rights in Y.

• Condition 3 is that X holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of Y.

• Condition 4 is that X has the right to exercise, or actually exercises, significant influence or control over Y.

• Condition 5 is that (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 the beneficial owners have been identified, the Act only requires those that are “registrable” to appear on the Register. For that purpose, the relevant tests in Schedule 2 of the Act will need to be applied.

Where will the information be held and how often will it need to be updated?

The information will be held at Companies House. The Register will be public (although not all information will be available for inspection). Once registered, overseas entities will receive an “overseas entity ID” from the Registrar of Companies.

Information on the Register will need to be updated annually. Broadly, an overseas entity will have 14 days within which to deliver the updated information.

The first period of 12 months will commence on the date of registration of the overseas entity and the updating duty will apply every 12 months thereafter. An overseas entity may choose to update before the end of the update period and an early update appears to have the effect of resetting the clock in respect of when the next update is due.

Both the overseas entity and its officers will commit an offence if they fail to keep the information updated.

How do the Act and the Register impact property ownership in England and Wales?

The Act amended the Land Registration Act 2002 (LRA 2002). The amendments gave rise to a significant change in practice for overseas entities that own registered land in England and Wales and for third parties that deal with them.

Checks of the Register and contractual provisions dealing with the Act have become a standard part of transactions involving an overseas entity.

In relation to land in England and Wales:

• no application may be made to register an overseas entity as the proprietor of a “qualifying estate” (namely, a freehold estate or a leasehold estate granted for a term of more than seven years) unless, at the time of the application, the entity is a registered overseas entity or an exempt overseas entity (of which, to date, there are none);

• where an overseas entity is the registered proprietor of a “qualifying estate” and became the registered proprietor pursuant to an application made on or after 1 January 1999, the Land Registry will be required to enter a restriction on that freehold or leasehold title preventing the registration of any disposition by that overseas entity unless one of the permitted exceptions below applies:

(a) the entity is a registered overseas entity, or is an exempt overseas entity, at the time of the disposition;

(b) the disposition is made in pursuance of a statutory obligation or court order, or occurs by operation of law;

(c) the disposition is made in pursuance of a contract made before the restriction is entered in the register;

(d) the disposition is made in the exercise of a power of sale or leasing conferred on the proprietor of a registered charge or a receiver appointed by such a proprietor;

(e) the Secretary of State gives consent to the registration of the disposition; or

(f) the disposition is made by a specified insolvency practitioner in specified circumstances; and

• limitations on dispositions also apply to overseas entities which are entitled to be registered as the proprietor of a qualifying estate (and became entitled to be registered on or after 5 September 2022) but which are not yet registered. Again, a disposition will not be able to be registered unless a specified permitted exception applies. These are similar to the permitted exceptions referred to above.

The dispositions by overseas entities which are caught are the transfer of land, the grant of a lease of more than seven years and the creation of a charge over the land.

An overseas entity that fails to comply with its updating duty will not be treated as being a “registered overseas entity” for the purposes of the LRA 2002 until it remedies the failure.

What happens if an oversea entity makes a disposition that cannot be registered?

It is a serious offence for an overseas entity and its officers to make any disposition of a freehold or leasehold estate in breach of the provisions. A person found guilty of such an offence will be liable to imprisonment for a maximum term of five years or to a fine (or both).

If a disposition cannot be registered because it is not possible to comply with the restriction, the Act contains a provision allowing for the Secretary of State, in limited circumstances, to consent to the transaction being registered. However further details on this process are expected in secondary legislation which has not yet been published.

Are there any transitional provisions?

Yes. The Act created a transitional period of six months which commenced on 1 August 2022 and ended on 31 January 2023.

An overseas entity which was a registered proprietor of a qualifying estate pursuant to an application made prior to 1 August 2022 (and on or after 1 January 1999) needed to either be on the Register, or have a pending application for registration, by the end of the transitional period in order to avoid committing a criminal offence.

In addition, an overseas entity that disposed of land on or after 28 February 2022 had to, if not exempt, provide the required information about the disposition and its beneficial ownership to Companies House by the end of the transitional period at the latest. Failure to do so was a criminal offence. Again, the officers of the overseas entity could be liable.

Where an overseas entity was also applying to go on the Register as it continued to own UK land it was required to disclose any dispositions between 28 February 2022 and the making of the application, in its application form.

For overseas entities that became the registered proprietor of a qualifying estate pursuant to an application made prior to 1 August 2022 (and on or after 1 January 1999), the restriction which was applied to their title did not take effect until after the end of the transitional period.

Companies House announced on 10 August 2022 that it had written to overseas entities which already owned or leased land in the UK highlighting the registration obligations. Companies House indicated it had sent a second letter on 9 January 2023. We have some concerns that these letters may not always be reaching their intended recipients (for reasons such as contact details becoming outdated with time).

How do the Act and the Register impact on lenders?

The Act and the Register affect lenders which lend money to overseas entities on the security of land in the UK. It does so in two main ways.

When finance is provided

Finance documents are being amended to reflect the provisions of the Act.

For some time after the Register was created, the scope of the amendments remained in a state of flux market as participants sought to understand the issues created by the Act.

Greater market certainty resulted from the publication by the Loan Market Association (the LMA) of its guidance note on 28 November 2022. This suggested the inclusion of:

• a condition precedent; and
• where the commercial parties agree, a specific undertaking by each obligor that it will comply with any obligation it may have, including the obligation to comply with any notice it may receive, under the Act in respect of the Register; although the LMA expressed its view that such an obligation was already covered by the compliance with laws and authorisations undertakings in its real estate facility agreements.

Ultimately, the terms of the finance documents which are intended to ensure compliance by obligors with their obligations under the Act remain matters for the commercial parties themselves. Different parties will take different views.

When security is enforced

One of the sanctions for non-compliance with the legislation is that the Land Registry will refuse to register a disposition made by a non-compliant overseas entity.

The sanction carries with it the risk that a lender may be unable to enforce its remedies by selling land which is subject to security to a third-party purchaser.

However, it is reassuring for lenders that the legislation creates a safe harbour for certain types of enforcement action by lenders. The relevant safe harbour refers to a disposition “made in the exercise of a power of sale or leasing conferred on the proprietor of a registered charge or a receiver appointed by such a proprietor”.

While there are certain ancillary questions likely to be of interest to a mortgagee or a receiver which are not addressed in the Act the essential nature of the safe harbour is comforting to lenders.

The scope of the safe harbour is not as clearly articulated in the case of a sale by an administrator which can be described as an enforcement procedure if and when the administrator is appointed by the holder of a qualifying floating charge.

As noted, the legislation also refers to a disposition “made by a specified insolvency practitioner in specified circumstances” but we await the remaining statutory instrument under the Act to clarify what those two expressions mean.

A specified insolvency practitioner seems almost certain to include administrators (and liquidators) but it may also include an overseas insolvency officer whose powers are recognised by the English courts.

As noted, the relevant instrument has not (as of 1 February 2023) been published and is eagerly awaited to complete the legislative framework.

Other Legislative Developments

The Economic Crime and Corporate Transparency Bill 2022-23 (the Bill) was introduced into the House of Commons on 22 September 2022. It passed that House and is now before the House of Lords.

The key concept underpinning the Bill is “registry reform” and it seeks to give the Registrar of Companies powers to ensure the accuracy of information provided to it with the aim of preventing economic crime.

The concepts underpinning the Bill and the Register are connected. As a result, the Bill may affect the Register in certain ways. An example is clause 165 (which was clause 139 of the Bill as introduced into the House of Commons) which will, if it becomes law, amend the definition of “registered overseas entity” in Schedule 4A of the LRA 2002.

In brief, an overseas entity would not be treated as a registered overseas entity for the purposes of Schedule 4A if (amongst other things) it failed to respond to a notice from the Registrar of Companies under a new power to require information to be contained in s. 1092A of the Companies Act 2006.

One consequence is that an overseas entity would not be treated as being “registered” for the purposes of any restriction entered on its title and, as a result, it would be unable to make a relevant disposition if it failed to respond to the notice.

Also, it would appear that a search of the Register should not be relied upon unless it were supported by a separate confirmation issued by the Registrar of Companies that there were no outstanding notices against the overseas entity in question. This would create delay and cost for third parties searching the Register (such as lenders).

A Joint Working Party of the Company Law Committees of the City of London Law Society and the Law Society of England and Wales reviewed the Bill and published a report on 7 October 2022. It strongly recommended the deletion of the clause.

The Bill has been amended during its progress through parliament and it remains to be seen whether clause 165 will survive. However, the impact of the Bill on the Register remains an issue of which market participants should be aware.