What impact will the Economic Crime (Transparency and Enforcement) Bill have on real estate transactions in the UK?

Ongoing events in Ukraine have prompted governments worldwide to impose wide ranging economic sanctions on Russia and those closely connected to the Russian regime.

This has rightly meant heightened scrutiny on the source of any foreign funds spent in the UK, particularly foreign investment in UK real estate, and resultantly the Government has accelerated the Economic Crime (Transparency and Enforcement) Bill (“the Bill”) through Parliament. This received its first reading on 28 February 2022.

First proposed by David Cameron in 2016, the Bill’s measures have been discussed for several years and aim to provide transparency of ownership of UK property by foreign bodies with a view to feeding into wider law enforcement. The proposed regime will catch commonly used ownership structures such as those incorporated in Guernsey, Jersey and Luxembourg.

This article highlights the key changes proposed and the likely consequences for the conveyancing process and land registration.

The New “Register of Overseas Entities”: What is proposed?

Central to the Bill’s proposals is the creation of a new Register of Overseas Entities, which will be kept by Companies House. This will operate in a similar way to the current “Persons of Significant Control Register” for companies incorporated in England and Wales.

Unless an exemption applies, it is proposed that any overseas entity that owns property in the UK must register on the Register of Overseas Entities (becoming a “Registered Overseas Entity”) and will be required to update this information annually. To become a Registered Overseas Entity the entity will need to provide Companies House with details of their beneficial owner(s) as well as information regarding their ‘managing officers’ (e.g. director’s names).

Failure to comply will be a criminal offence punishable by a prison sentence of up to two-years and/or a fine. Enforcement is underpinned by the participation and involvement of HM Land Registry, since the proposals apply to freehold land and leasehold interests granted for a period of more than seven years (i.e. registrable dispositions requiring Land Registry registration). These are referred to as “Qualifying Estates” in the Bill.

Failure to register an overseas entity if required will mean that transactions involving Qualifying Estates will not be able to be registered at the Land Registry, which in turn may mean that sales/purchases/leases of property held by or purchased by an overseas entity will not be able to proceed to completion in the first place  For those unwilling to comply, they will likely find that they cannot liquidate their property assets.

Impact of the Bill on real estate transactions in the UK

Purchasing:

An overseas entity looking to register a property interest at HM Land Registry will need to satisfy the following conditions:

–    They must be a Registered Overseas Entity; or
–    Be an “Exempt Overseas Entity” (the qualifications for exemption have not yet been fully established).

Evidence of registration or exemption will need to be provided to HM Land Registry before the Land Registry will register the foreign entity’s purchase. Registration at the Land Registry is required to perfect the buyer’s title to a property so the buyer will not be able to deal with or protect its interest satisfactorily until registration has been completed.

Selling: 

Overseas entities who have become the registered proprietors of Qualifying Estates in the last 20 years in England and Wales (and 14 years in Scotland) will eventually find that their properties’ registered titles are automatically updated by HM Land Registry with a  restriction which will prevent the registration of any disposition (e.g. a transfer, a legal charge or the grant of a Lease for a period of seven years or more) without compliance with the new regime.

In practice this means that sales will not proceed to completion until the overseas entity is a Registered Overseas Entity, as well advised Buyers/Tenants will not proceed without evidence that the restriction on the title can be complied with, otherwise they will not be able to be registered as the new owner at HM Land Registry following completion.

Some exceptions are proposed to the requirement for restrictions to be registered/complied with, however:

–    If the overseas entity is an Exempt Overseas Entity (for example a public authority or foreign government) or is already a Registered Overseas Entity.
–    The disposition was made under a contract exchanged before the restriction was registered.
–    The disposition was made by the owner of a registered charge or a receiver exercising their power of sale (e.g. a lender).
–    There is a statutory obligation and court order authorising the registration of the disposition.
–    The Secretary of State consents to the registration of the disposition.
–    If the disposition is to be made by a specified insolvency practitioner in specified circumstances.
It is not yet clear what will happen if a Registered Overseas Entity has failed to keep their registration updated on an annual basis as required. Presumably a Registered Overseas Entity in default of this obligation would be unable to deal with their property assets until the default is rectified.

How long before such restrictions are entered on the registered titles of property held by Overseas Entities?

The Bill provides that:

•    If an overseas entity was registered pursuant to an application made before the Bill takes effect, the Land Registry must enter the restriction within 12 months of commencement of the new law although the restriction will not take effect until 18 months have passed after commencement of the law.

•    If an overseas entity is already the registered owner of land acquired on or after 1 January 1999 but before the passage of the legislation the draft Bill states the overseas entity will have 18 months from the commencement of the legislation to become a Registered Overseas Entity. Should the overseas entity continue to own the land but fail to register, the overseas entity (as well as their managing officers) will be guilty of a criminal offence (up to two-year prison sentence and or a fine). They will also in effect be unable to deal with their property until registration has taken place.

•    If an overseas entity purchased land on or after 1 January 1999 but is not a Registered Overseas Entity or exempt, the Secretary of State can serve notice on the entity requiring registration within six months of the date of the notice. Failure is to be a criminal offence punishable by up to a two-year prison sentence and or a fine.

Since publication of the Bill the Government has come under pressure to substantially reduce the timeframe in which the Land Registry will place restrictions on property held by Overseas Entities. It would appear that the Government is considering cutting the deadline for registration from 18 months to 6 months, and the Labour Party is pushing for an even bigger reduction to just 28 days, as they are concerned sanctioned Russians (or other foreign property owners) could simply sell properties before the new law bites and move the proceeds of sale out of the country.

Next Steps

We will be closely watching the passage of the Bill through Parliament and Companies Houses’ implementation of the Register of Overseas Entities. We will also be following the Government White Paper which sets out how the Government intends to facilitate the required changes at Companies House to support the proposed changes.

If the government takes an approach similar to the one taken with the Trust Registration Service, it is possible that lawyers and other professionals will be unable to accept instructions from overseas entities, unless they are exempt, until they are Registered Overseas Entities.

Assuming the Bill receives Royal Assent in a form substantially similar to the Bill, we recommend that clients who hold land in companies incorporated overseas ready themselves to make an application for registration on the Register of Overseas Entities.

In due course, we also recommend that proactive steps are taken to demonstrate any overseas body is a Registered Overseas Entity or proof of its exemption, to ensure that transactions will not be impeded by the restrictions that the HM Land Registry will register.

For clients in the process of purchasing from an overseas entity, the Bill and its potential implications should be considered carefully. This is especially so if completion is not likely to take place until the law takes effect as reliance upon the “contracts exchanged before enactment” exception would be risky until the legislation has been finalised.

If you would like to discuss the Bill or the likely changes in further detail, please contact Laura Keatley.