Member Article

The Economic Crime (Transparency and Enforcement) Act received Royal Assent on 15 March 2022. Its effects will be felt far and wide across the UK real estate industry.

We explained in our article Economic Crime Bill – what it means for real estate, that the aim of the new Act is to crack down on foreign criminals using UK property to launder money. Now it has received Royal Assent, this article considers its terms more closely and explains how it will affect overseas entities that own, acquire or dispose of land in the UK and also sellers, buyers, landlords, tenants and lenders who enter into transactions with those entities. The Act applies similar provisions across England, Wales, Northern Ireland and Scotland.

Although the Act has received Royal Assent, it has yet to be brought into force. Implementation will be by statutory instrument and, before that can happen, regulations are needed to implement detailed requirements about the information to be provided under the Act. Also, Companies House and the land registries in England and Wales, Scotland and Northern Ireland (the UK land registries) need to have systems in place to be ready to deal with the requirements on their part that the Act introduces. However, it is known that the government is keen to implement the Act as soon as possible.

Overview

The Act applies to ‘Overseas Entities’ which are legal entities governed by the law of a country or territory outside the UK. Individuals are not Overseas Entities for the purposes of the Act.

It establishes a new Register of Overseas Entities at Companies House and requires Overseas Entities owning or acquiring certain land interests in the UK to register themselves and details of their beneficial ownership and managing officers in the new register.

The beneficial owners whose details have to be disclosed are, broadly, anyone holding more than 25% of the shares or voting rights in the Overseas Entity, anyone having the right to appoint or remove a majority of the board of directors and anyone having the right to or actually exercising significant influence or control over the Overseas Entity.

Beneficial owners include trustees of a trust, partners in a partnership and unincorporated associations or other entities who meet any of these requirements. Where a disclosable beneficial owner is a trustee, additional information about the trust and its beneficiaries must also be provided.

The Act applies to “Qualifying Estates” in land and, in certain cases, to legal charges granted over Qualifying Estates.  A “Qualifying Estate” is a freehold title to land or title to a lease (a Qualifying Lease) originally granted for a term of more than 7 years from the date of grant (21 years in Northern Ireland).  The position in relation to Scotland is set out below.

The Register of Overseas Entities - when to register

The Act imposes obligations on Overseas Entities that own or acquire Qualifying Estates to register in the new Register of Overseas Entities at Companies House and to update that registration every 12 months. There are several triggers for the obligation to register with the main ones being:

• Before an application is made to any of the UK land registries for registration of an Overseas Entity as the owner of a Qualifying Estate;
• In England and Wales only, within 6 months of the Act coming into force where the Overseas Entity is already registered as the owner of a Qualifying Estate at  HM Land Registry pursuant to an application to be registered as the proprietor made on or after 1 January 1999;
• In Scotland only, within 6 months of the Act coming into force where the Overseas Entity was registered in the Land Register of Scotland as the proprietor of a plot of land or tenant under a lease on or after 8 December 2014; and
• Where the Overseas Entity became entitled to be registered as the owner of a Qualifying Estate after the Act comes into force but is not yet registered as the owner of that estate and wants to transfer it, grant a Qualifying Lease or charge the estate.

In England and Wales and Scotland (but not Northern Ireland), Overseas Entities that have disposed of any Qualifying Estate since 28 February 2022 will have to register on the Register of Overseas Entities within 6 months of the Act coming into force and disclose details of the disposition when they apply to be registered.

The Secretary of State can publish regulations that may exempt certain Overseas Entities from the registration (and updating) obligations. There are civil and criminal penalties for failure to comply with the registration obligations for the Overseas Entity and its managing officers who are responsible for compliance with the requirements of the Act.

Effect on real estate transactions

A large part of the Act is devoted to the registration of Overseas Entities in the new register at Companies House but the enforcement regime to ensure those registrations happen is facilitated by the UK land registration system.

Legal title to land is mainly vested through land registration. Where freehold and leasehold estates change hands completion by registration is required. Where Qualifying Leases are granted or assigned, registration of title is required. The priority of a charge on registered land is secured by registration. Registration of title is state guaranteed.

However, the Act provides that;

• Where an Overseas Entity acquires a Qualifying Estate, it may not make an application to register its title to that estate unless it has complied with its registration requirements in relation to the Register of Overseas Entities.  For Qualifying Estates in England and Wales, the Land Registry will enter a restriction on the title preventing the Overseas Entity disposing of the Qualifying Estate, granting new Qualifying Leases or charging the Qualifying Estate. In Northern Ireland, an inhibition will be entered on the register on the same terms. There are no corresponding entries that can be made on the register by the Keeper of the Registers in Scotland.
• In England and Wales, where an Overseas Entity is already the registered owner of a Qualifying Estate (and applied to register that land on or after 1 January 1999), HM Land Registry will enter a restriction on the title to its property within six months of the Act coming into force. The restriction will take effect at the end of that six-month period. It will have the effect of prohibiting the registration of any future transfer, grant of a Qualifying Lease or charge unless and until the Overseas Entity complies with its registration requirements in the Register of Overseas Entities or unless one of a limited number of exceptions applies.
• Similar limitations apply where an Overseas Entity acquires a Qualifying Estate after the legislation comes into effect and is not yet registered as the owner but wants to transfer, let or charge that land. Here it is restricted from doing so by law unless it first complies with its registration requirements in the Register of Overseas Entities or one of the limited exceptions applies.

For real estate transactions in Scotland, the provisions of the Act reflect the differences in land registration systems including the fact that it is not possible to enter a restriction on the title in the Land Register. Instead:

For acquisitions, the Keeper of the Registers of Scotland will reject an application to register a disposition, lease (for more than 20 years) or assignation in favour of an Overseas Entity unless the new registration requirements of the Act have been complied with;

For disposals by Overseas Entities of titles registered on or after 8 December 2014, the Keeper will reject a disposition, lease, assignation or standard security granted by that Overseas Entity unless it has complied with its registration requirements in relation to the Register of Overseas Entities.

Any relevant disposal made in breach of a restriction/inhibition imposed by the UK land registries or the Act’s provisions will be a criminal offence.

Comment

Enforcement of the Act’s registration requirements via the land registration system will clearly affect the titles and investments belonging to Overseas Entities owning land in the UK. But it will also be a key concern for any party wanting to enter into a relevant disposition with an Overseas Entity.

Anyone wishing to take a transfer of, lease from or charge over land owned by an Overseas Entity will need to be sure that it can register its interest after completion. This will entail close enquiry and could delay transactions whilst formalities are concluded. Provisions requiring an Overseas Entity to comply with its registration (and updating) obligations – and to provide evidence of such compliance – are likely to be needed in the contractual documentation.

Anyone transferring a Qualifying Estate or granting a Qualifying Lease to an Overseas Entity will want to ensure that the Overseas Entity will be registered as the new owner of the Qualifying Estate or new Qualifying Lease.  Before the Overseas Entity can make an application to the UK land registries to be registered as the owner, it must be registered on the Register of Overseas Entities or be an exempt overseas entity. Again, provisions requiring an Overseas Entity to comply with its registration obligations (and to provide evidence of such compliance) are likely to be needed in the contractual documentation.