Why property lawyers are on edge about the register of overseas entities
It is rare that property lawyers are put on edge by legislative changes. In this area of the law they are generally few and far between (some in the profession still bemoan the extent of the changes brought in by the Land Registration Act 2002). However, the Economic Crime (Transparency and Enforcement) Act 2022 has caused a few ripples in our circle of late.
Navigated through parliament with unprecedented haste in the wake of the invasion of Ukraine, it endeavours to lift the veil on the ownerships behind foreign vehicles which hold property in the UK. It requires the registration of foreign vehicles at Companies House before any applications can be made to the Land Registry, as well as applications by all existing overseas entities that already own property by the end of January 2023.
So why has it caused such concern, and what have our clients been worried by?
First and foremost, non-compliance is a criminal offence. This may not be as much of an issue for some owners outside of the UK but the legislation also imposes more practical means of seeking compliance. Once an overseas entity’s acquisition is registered at the Land Registry, a restriction will be entered on the property title, preventing future disposals unless the overseas entity registers at Companies House. It will, in effect, prevent any sales or lettings of the property and would stymie the asset. This would also restrict the raising of debt in relation to the property and is a serious impediment.
Second, the timing of this, with full details being released on 1 August, and the shortness of the period for transitional arrangements. After 5 September 2022,all applications from overseas entities to the Land Registry would need the registration done in advance. For transactions in the process of being negotiated with impending completions, this does not give parties long to get to grips with the new system and its requirements. Inevitably there will be delays to completions as a result.
Third, the information which is submitted to Companies House will need to be verified. Several established trust and company service providers already appear to be geared up to do this but law firms, in general, look like they will not. As a result, there has been a bit of a dash to find a suitable provider from clients. It has taken a few days for the first companies to appear on the register but this is now happening, so clients are relieved that there is at least evidence that the process can be achieved. Clients expect lenders to be adding requirements to satisfy this into their loan agreements and this will need to be factored into their timelines.
Will it fully achieve its purpose?
Unfortunately, the jury is still out on this. The entity must disclose prescribed information about the beneficial owners. However, this does not necessarily result in the disclosure of the ultimate owners of the property.
By example, where a UK property is registered in the name of one or more trustees, as it stands, the legislation requires details of the beneficial owners of the trustees to be disclosed, not any parties with the main economic interests. It may also be possible to state in the application that certain information about the registrable beneficial owners could not be obtained. This does not appear to preclude registration, which may encourage entities to make statements of this kind instead of making disclosures. Verification should mitigate this, assuming the information is rigorously interrogated.
Companies concerned about disclosure and registration may be tempted to reshuffle their ownership structures although with existing owners there are anti-avoidance provisions which require registration where assets are moved in the transitional phase. For new transactions, the obvious way to avoid the provisions of the new legislation is to use a UK entity, albeit the myriad of transparency regimes now in play mean that the information is likely to be required by at least one government department (there is also the PSC and Trust Registration Service which applies in similar ways to UK companies and trusts).
There is, perhaps, still some concern with respect to the transparency of English limited partnerships although in the current climate you may not be surprised to hear that there is further legislation in the offing which could potentially tighten this up and close any loopholes in the new legislation. It seems, as property lawyers, it is a topic we are going to have to keep an eye on over the coming months.
Article by Dan Marriott originally published by React News on 23 August 2022 and reproduced with permission. Copyright React News. For information on further use, please visit reactnews.com.