Background
The Economic Crime (Transparency and Enforcement) Act 2022 (“ECA“) was fast-tracked into law on March 15 2022 as a result of the Russian invasion of Ukraine. It introduced a new Register of Overseas Entities (“ROE“) to be administered by Companies House which opened on August 1 2022 and the associated land registration elements of the ECA came into force on 5 September 2022. The landscape for dealings with or by Overseas Entities has irreversibly changed as a result. The intention of this article is to highlight some practical consequences for real estate transactions.
The aim of the ECA is to elicit disclosure of the beneficial (actual) owners or, in certain circumstances, the managing officers of every overseas entity (“OE“) holding UK property. For the purposes of the ECA, an OE is a corporate body which has separate legal personality to its shareholders or members and which is governed by the laws of a jurisdiction outside the UK. Typically, this will be a company or a limited liability partnership, a limited partnership in certain jurisdictions or some other entity which can sue or be sued in its own name. Outside the UK means any jurisdiction other than England, Wales, Scotland and Northern Ireland.
By way of a summary (the complexities are worthy of several further articles) the ECA achieves its aims by setting up the ROE and requiring every OE which owns UK real estate acquired since 1 January 1999 to be registered on the ROE. Upon registration, the OE will be awarded a unique OE ID number. To be registered on the ROE, an OE must disclose certain prescribed information (which must be verified in a prescribed manner) regarding itself and its registrable beneficial owners (or, where are none (which, in very simple terms, might be because no person owns more than 25% of the shares or voting rights in the OE), its managing officers). This information must be updated formally at least once every 12 months whether or not there have been any changes. For the purposes of the ECA, an OE is not treated as being registered if it has not complied with its updating obligation.
For OEs currently owning UK real estate there is a transitional period (which expires on 31 January 2023) at the end of which they must have applied for ROE registration.
Failure to be ROE registered, failure to update and/or failure to provide the prescribed information verified in the prescribed manner each constitute criminal offences by the OE and its officers. These offences are punishable by daily fines of up to £2,500 and imprisonment for up to 5 years.
So much for the background – what are the implications?
Acting for a party dealing with an OE
For the purposes of this article, “deals with” means taking a transfer of land, taking a lease of seven years or more, or taking a legal charge in each case from an OE.
After 5 September, where a party deals with an OE, the position depends on whether the OE was already the registered proprietor of the registered land prior to 1 August 2022.
- If the OE was the registered proprietor before 1 August 2022, the OE’s registered land will be subject to a restriction at the Land Registry title to ‘restrict’ how it deals with its land. That restriction will not take effect until 31 January 2023, the expiry of the transitional period (“Transitional Restriction“). If the dealing is completed and an application to register the dealing is lodged with the Land Registry prior to 31 January 2023, the registration of the dealing will be unaffected by the ECA.
There is still an element of risk. If the Land Registry application is rejected for any reason after 31 January 2023, any new application would fall within the new ECA regime. In such circumstances the outcome will depend on whether the Land Registry had already placed the Transitional Restriction on the OE’s title to land as at the date of the contract for the dealing. We would look back in time and if the contract for the dealing was:
- after the entry of the Transitional Restriction, a fresh application to the Land Registry to register the dealing would fail because the OE was not on the ROE as at the date of the dealing; or
- before the entry of the Transitional Restriction, an exception could apply, so a fresh application to the Land Registry could succeed.
- If the OE acquired its interest on or after 1 August 2022, the OE must have a current registration on the ROE at the date of any dealing it enters into after its acquisition of its property. This will be reinforced by a restriction which the Land Registry will automatically place on the title of every OE acquiring a property after 1 August 2022 (“Immediate Restriction“). If the OE is not ROE registered as at the date of the dealing, the dealing cannot be registered at the Land Registry.
The lack of ROE registration is a defect which cannot be cured by a subsequent registration of the OE on the ROE. Where a party deals with an OE it will now be a fundamental part of the due diligence to establish that the OE has an up to date registration on the ROE.
The dealings which cannot be registered at the Land Registry will not be void, they simply cannot be perfected without a further disposition or dealing. For example, in relation to a transfer, the OE seller would hold the registered title on trust for the buyer; leases and charges would take effect as equitable leases and equitable charges. Commercially, of course, this would create huge difficulties for the buyer, tenant or lender. The OE would be under a continuing obligation to perfect the title of the buyer, tenant or lender by virtue of obligations implied by title guarantee or covenants for further assurance, but this would be of little practical value unless and until the OE has an up to date registration on the ROE.
Acting for an OE
Here, matters are more straightforward but no less onerous. After 5 September 2022 an OE cannot be registered as proprietor of a property unless as at the date of the application to be registered at the Land Registry the OE has a current up to date registration on the ROE. It is of fundamental importance, therefore, that the OE has such a registration either (ideally) at the time of the dealing or, at the latest, by the expiry of any relevant priority period and prior to the submission of the application to the Land Registry. The Land Registry is obliged to reject outright any application by an OE unless the application includes details of the OE’s ID.
Further, any simultaneous dealing entered into by the OE cannot be registered at all unless the OE is registered on the ROE at the date of the simultaneous dealing. The ECA has been designed to catch a legal charge to assist in the purchase of the land by the OE, a lease back by an OE and, depending on the circumstances, a sub sale arrangement if the OE undertakes such dealing without being ROE registered. Lenders, tenants and buyers from an OE will need to be alive to the issue as this prohibition on dealings will not yet be apparent on the registered title by way of a Transitionary Restriction or an Immediate Restriction because the OE’s title is not yet perfected at the Land Registry.
Key points
- The ECA provides for a new register of overseas entities to disclose beneficial owners who own or acquire land.
- The ECA will create a practical restraint in the event of non-compliance as dealings with land will not capable of being registered.
- The ECA establishes criminal offences for non-compliance, potentially punishable by fines and imprisonment.
- Any overseas property owner should seek to get on the ROE as soon as possible to help avoid delays to any dealings.
- Please refer to our article for details on how an OE would register upon the ROE.