If you are an Overseas Entity and you own or are thinking about acquiring land in the UK, are you ready for the Economic Crime (Transparency and Enforcement) Act 2022 (ECTEA)? What about if you are thinking of buying UK property from an Overseas Entity: will ECTEA delay your transaction?
We’ve compiled a note of things that require attention, as we understand ECTEA will be implemented and the new Register of Overseas Entitles opened at Companies House on 1 August 2022.
We originally posted our first article about ECTEA in March – click here. The legislation was rushed through Parliament as part of the UK’s response to making Russian sanctions more effective in the wake of the invasion of Ukraine and there was much uncertainty about how it would operate in practice. With most secondary legislation now in place some of those questions have now been answered.
1. What does the new regime do?
Overseas Entities which own a “qualifying estate” in the UK must register at the Register of Overseas Entities (ROE) to be set up by Companies House: unless there is a change of heart, the commencement date of ECTEA will coincide with the setting up of the ROE at Companies House. Although yet to be confirmed, Parliamentary sources and Companies House themselves expect this to be on 1 August. Once in force, Overseas Entities (OE) owning a qualifying estate in England or Wales will have six months to register. Unless exempted, the OE (and its officers) will commit a criminal offence if the OE owns a qualifying estate but the OEC is not registered on the ROE.
• What is an Overseas Entity: This will be any legal entity that is not governed by UK law. So Guernsey and Jersey companies will be OEs.
• What is a qualifying estate: A qualifying estate is a freehold estate or leasehold interest in land granted for a term of more than seven years from the date of grant.
Restrictions will be placed on title registers at the Land Registry where property is owned by an OE to make sure that registration at the ROE is up-to-date before any dispositions of the property (which would include transfers, grant of registerable leases or charges) can be made.
2. How does an Overseas Entity register at the ROE?
Applications should be made electronically and must include the “required information” prescribed in the legislation for the beneficial owners of the OE or its managing officers.
Beneficial owners generally only need to be registered if they hold more than 25% of the shares or voting rights in the entity, can appoint a majority of its directors, or have some other significant influence or control over it (including through a trust or partnership structure); similar thresholds to those in the People with Significant Control Register for UK companies. OEs which are involved in transactions now should be preparing the “required information” so that their applications can be made post 1st August. If there is any uncertainty over the details of the required information notices can be served on persons who may hold that information. Note that this could delay an application to register at the ROE as persons served with a notice have up to one month to respond.
Before the registration can be processed by the ROE, a UK supervised “relevant person” will need to verify the “required information”. These verification checks must be carried out by a UK based agent that is supervised under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (the MLRs).
These supervised agents, as defined by the MLRs, are:
• Credit institutions
• Financial institutions
• Auditors, insolvency practitioners, external accountants and tax advisers
• Independent legal professionals
• Trust or company service providers
• Estate and letting agents.
Companies House states that it will be quicker and easier for the supervised agent to make the registration application on the OE’s behalf and registration by the OE themselves seems to be discouraged. There are concerns currently, however, whether the agents listed in the MLRs will be competent to verify documents from overseas jurisdictions as these may not be documents UK advisors will be familiar with. This may cause problems in the short term but it is anticipated that agents with the appropriate competency will enter the market to offer a verification service in due course. We will keep this under review.
Supervised agents will need to contact Companies House to get an assurance code before they can verify or file on the OE’s behalf. The assurance code is the equivalent of a signature. Information on how this will operate is still awaited.
Once registered, the entity will be given an OE ID number. This will be required to transact property in England and Wales.
3. Protection of information
Companies House has confirmed that the name of the OE and its beneficial owners will be publicly available on the find and update company information service once the OE’s registration has been accepted. However, secondary legislation confirms that individuals will be able to protect their information from public disclosure under certain limited circumstances. Individuals can apply to protect their information if they believe the activities of their OE, or the characteristics or personal attributes of the individual when associated with that OE, will put them or the people living with them at serious risk of violence or intimidation. We expect the threshold here to be quite high, given that the purpose of the legislation is transparency.
The application process will be similar to the process currently in place for company directors, LLP members and Persons with Significant Control, and more information will follow on this in due course.
4. Requirement to update the register
The OE must update the register every 12 months with any changes to the information provided. The update must be provided within 14 days of each 12 month anniversary of the initial registration. Be aware that if the update has not been made, the Land Registry will not view the OE ID number as valid. This means that extra care will need to be taken for transactions which are due to complete when updates are required, and contractual provisions will be required to ensure that an OE seller does not complete until updates have been made. Updates will likely be required even if there have been no changes to the company ofr its beneficial ownership (much like an annual confirmatory statement for companies registered in England and Wales).
5. How will applications to the Land Registry be impacted by the new regime?
The Land Registry will enter restrictions on all titles where the registered proprietor is an OE, provided the OE became the registered owner on or after 1 January 1999 (This is the date from which the Land Rregistry can easily extract a dataset for OE’s). Restrictions are expected to be added to titles owned by OEs very soon after ECTEA comes into force but those restrictions will not take effect (i.e. need to be complied with) until the end of 6 months after commencement, Once in force, the Land Registry will not deal with any disposition of an OE’s property unless either:
• The registered proprietor has a valid OE ID number from the ROE or is exempt (but there are currently no exemptions available);
• The disposition is made pursuant to a statutory obligation or court order or occurs by operation of law;
• The disposition was made pursuant to a contract made before the Land Registry entered the restriction on the register or, if earlier, made a note in the day list of its intention to register the restriction;
• The disposition was 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 proprietor;
• The Secretary of State gives consent under para. 5 of ECTEA to the registration of the disposition;
• The disposition was made by a specified insolvency practitioner in specified circumstances.
The Land Registry have indicated that applications which are currently pending but which have not yet been processed for a particular parcel of land (i.e. matters on the day list) will be dealt with before a restriction is added.
The Land Registry will start entering the OE ID number issued by the ROE in the proprietorship register of the title.
6. Impact on buyers and sellers
• Buyers, tenants and lenders where the seller is an OE
A buyer, tenant of a new registrable lease or lender must be careful, as they need to ensure that the proprietor of the land has a valid OE ID number by the completion date or that the transaction falls within transitional provisions which will permit registration without compliance with any restriction placed on the title. Where there is a transaction, the safest option is to put OE provisions in the contract for additional protection to ensure that a valid OE ID is provided and maintained until an application to register has been lodged at the Land Registry.
If the buyer is itself also an OE, it will need to deal with its own registration at the ROE as soon as possible to ensure that it can submit its application promptly after completion; it does not need to wait until completion, it can apply as soon as the ROE opens for business and would be well advised to do so as we think delays are likely. An application cannot be made to the Land Registry until the OE is registered at the ROE; clearly any delay to registration at the Land Registry can have serious consequences if there are other pending applications.
From the point of view of the lender, the lender requires certainty that its security will be registered at the Land Registry. In practice this is likely to mean that a borrower who is an OE must have has a registered OE ID number before completion.
Once the ROE is operating smoothly, we expect parties will require registration at the ROE before proceeding to exchange but contractual provisions will still be required to ensure updating obligations are complied with.
• Sellers who are an OE are subject to transitional provisions
During the 6 month transitional period, provisions apply to stop OEs disposing of land without disclosure to the ROE. Effectively, any relevant disposal of a qualifying estate on or after 28/2/22 until the end of the transitional period should be disclosed to the ROE; either when an application is made to register the OE at the ROE or, if no application to the ROE is needed (because the OE does not need to register as it no longer owns any land in the UK), the statement on its own must be submitted to the registrar after the disposition has been made and in any event by the end of the transitional period. A relevant disposition is a freehold transfer, lease of more than 7 years or legal charge but excludes those made under court order or statutory obligation or by operation of law, but not sales by lenders or receivers they appoint.
There will be wider reaching changes affecting the conveyancing world as well. For example, Land Registry forms will be updated and the “Prescribed Information” for registered leases will also change to accommodate the inclusion of the OE ID number. These changes will affect even those transactions where there is no OE at all. We expect a 15 month transitional period before these new Land Registry forms are mandatory.
We may only have a couple of weeks before the new regime for OEs comes into being. Whilst there are still some areas of uncertainty the one thing that is clear is that a well advised OE should start to prepare the “relevant information“ required to support an application to the ROE now. Anyone entering into a property transaction with an OE in the meantime should ensure their contracts oblige parties to comply with the new regime so that all Land Registry requirements can be met on registration.