Introduction
After the Economic Crime (Transparency and Enforcement) Act 2022 ('the Act') came into force on 15 March 2022, Companies House opened the Register of Overseas Entities ('the ROE') on 1 August 2022.
Under the Act, which was fast-tracked through Parliament in response to events in Ukraine, overseas entities ('OEs') which own property in the UK are subject to several requirements that must be met in order for these entities to be registered. This article addresses the key concerns for lenders following the introduction of the ROE and the steps that lenders should now consider taking going forward.
Who must apply?
OEs which currently own or are acquiring qualifying estates in the UK must register on the ROE. Note the reference to qualifying estates (explained below), a lender which is itself an OE does not have to register on the ROE as it holds a charge, not a property title as such.
OEs that already owned qualifying estates prior to 1 August 2022 need to register on the ROE by 31 January 2023. This applies to OEs that acquired property or land on or after 1 January 1999 (in England and Wales) or 8 December 2014 (in Scotland).
Definitions
'Overseas entity' means a legal entity governed by the laws of a country or territory other than the United Kingdom. This means that companies incorporated in the Channel Islands, the Isle of Man and the Republic of Ireland will be classed as OEs.
'Legal entity' means a body corporate or a firm that is a legal person under the law by which it is governed (i.e. companies, LLPs and partnerships but not individuals).
'Qualifying estate' means a freehold estate in land or a leasehold estate in land granted for a term of more than 21 years from the date of grant.
It is important to note that the position for UK trusts is different because trusts do not have legal personality, so they do not fall into the above definition for a legal entity. Therefore, provided that the trust is not a separate legal entity under its domestic law, it does not need to register on the ROE. Instead, it must register with HMRC under the Trusts Registration Service which has very similar requirements in terms of the information to be provided, but does not operate as a publicly available register (unlike the ROE).
However, trustees who are beneficial owners of an OE will still need to disclose the details of their underlying beneficial ownership arrangements as required under the Act.
Considerations for Lenders
If an OE was already a registered proprietor of qualifying UK property when the ROE opened on 1 August 2022, the Land Registry will automatically place a restriction on the title of their qualifying UK property. This automatically prevents any disposition of the qualifying UK property by that OE after 31st January 2023 (the closing date for OEs to have applied for registration). This means that it cannot register any transfer, grant of a leasehold (longer than seven years from the date of grant) or grant a legal charge over the property unless it has complied with the registration and annual return processes set out in the Act.
Where a lender is advancing funds to an OE borrower for the purpose of acquiring qualifying UK property, they will not be able to register the acquisition at the Land Registry unless the OE has registered before the date of the application for registration. Consequently, the OE will not obtain legal title to the qualifying UK property and any charge granted to that borrower will not be registered at the Land Registry.
Additionally, if an OE fails to register on the ROE or does not file an annual update, the OE may face criminal sanctions under the Act which could have regulatory implications and negatively impact the reputation of lenders.
What should Lenders do now?
Lenders should review their current loan portfolios and ensure that any current overseas borrowers are taking steps to register on the ROE. This is more about ensuring that the borrower is aware of its obligations and has taken active steps to address these.
The Act does provide a specific exemption to lenders who are enforcing their security against pre-existing OE borrowers (i.e. those who were registered owners before the Act took effect). Where a sale is being undertaken by a lender (whether as mortgagee in possession or via an LPA receiver), then they do not need to ensure that the OE owner is compliant at the time of sale. The position is different where new security is being taken from an OE, whether over existing property or as part of a new acquisition. Here we expect lenders to insist that the OE can demonstrate compliance with the Act before monies are advanced to prevent a situation where the registration of a charge is delayed or restricted due to registration issues. This also mitigates any possibility of the OE facing criminal sanctions under the Act.
It is also prudent for lenders to incorporate specific representations or undertakings within any finance documents on overseas borrowers to comply with the requirements under the Act and to provide the lender with evidence of such compliance. This could include requirements such as the OEs filing an annual update to Companies House, obtaining the required confirmations from their beneficial owners and providing their overseas entity identification registration number as a condition precedent to the transaction.
Conclusion
The introduction of the Act and the ROE together represent an increasing degree of regulation and transparency regarding OEs acquiring and disposing of property in the UK. Lenders should be aware of the new requirements under the regime and ensure that compliance with the Act and ROE is maintained to avoid any issues with transactions. The legislation is complex and easily misunderstood by lenders and borrowers alike. Engaging with your professional advisers at an early stage where there is OE involvement is essential to prevent compliance requirements becoming the tail that wags the transaction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.