Draft Bill for new register of foreign companies owning UK property

The Department for Business, Energy and Industrial Strategy’s (BEIS) draft Registration of Overseas Entities Bill proposes a number of measures which mean overseas companies will have to register in a public register if they want to acquire land in the UK. The proposals are currently out for public consultation. Jonathan Edwards, specialising in company law at Radcliffe Chambers, outlines the BEIS proposals and comments on what the final outputs could look like.

Original news

The government has published in draft the Registration of Overseas Entities Bill, setting out provisions to establish a new beneficial ownership register of overseas entities that own UK property. The draft Bill is open for consultation until 17 September 2018. As announced in January, the government intends the register to become operational in 2021.

What is the draft Bill about and what is it intended to address?

The draft Bill sets out provisions to establish a new register of overseas entities and their beneficial ownership and to require any overseas entity that owns UK property to be entered in the register. This follows the commitment made at the Anti-Corruption Summit in 2016 to establish such a register in order to combat money laundering and achieve greater transparency in the UK property market. The information aspects of the new register are intended to mirror the regime currently in place for UK entities subject to the ‘persons of significant control’ regime (PSC) introduced by the Small Business, Enterprise and Employment Act 2015.

What are the key provisions of the Bill?

Clause 3 establishes a new ‘Register of overseas entities’, which Companies House for England and Wales will have responsibility to maintain, and Clause 4 and Schedule 1 require the following details to be registered for each overseas entity:

  • name of entity and country of incorporation or formation
  • registered or principal office
  • its service address and an email address
  • the legal form of the entity and the law by which it is governed
  • any existing public register in which it is entered
  • a statement as to its beneficial ownership together with supporting information

Once registered, an overseas entity will obtain a registered overseas entity ID and be required to update its information annually.

Registration with Companies House is prima facie voluntary. However, the Bill provides that failure to register, or to comply with the annual updating duty, will affect an overseas entity’s ability to conduct land transactions as (a) the overseas entity will be unable to register as proprietor of land in the UK and so obtain full legal title, and (b) any disponee would be unable to register a disposition of land in the UK by the overseas entity.

To whom does the Bill apply?

The draft Bill applies in principle to ‘overseas entities’ generally. Clause 2 defines ‘overseas entity’ to be a ‘legal entity that is governed by the law of a country or territory outside the United Kingdom’ and it covers ‘a body corporate, partnership or other entity’ that is a ‘legal person’ under the law by which it is governed. Limited companies or limited liability partnerships that are registered in England, Wales, Scotland or Northern Ireland are out of scope. However, companies that are registered in any of the Channel Islands or the Isle of Man will be caught because they do not comprise part of the UK. The Bill applies to ‘legal persons’ so that individuals will not be caught by it, even if they hold land as trustees for someone else.

Although any overseas entity could in theory apply to be registered, the draft Bill is directed towards compelling the registration of overseas entities that own registered land in the UK.

There is provision on the draft Bill, at clause 16, for exemptions, but only with narrow scope, where the Secretary of State gives notice if satisfied that there are ‘special reasons’ why a person should be exempted. Once registered, an overseas entity is required to provide updates annually until it successfully applies to be removed from the register. The main substantive requirement for such an application is that the overseas entity is not the registered proprietor of any ‘relevant interest in land’.

To whom will the register be viewable?

The register will be, for the most part, accessible to the general public. Clause 19 of the Bill provides that any person may inspect the register or obtain copies of material on the register, subject to the exceptions set out in clause 20. The main exceptions are for personal data—names, birth dates, residential addresses and contact details—of individuals. Additionally, clause 22 gives BEIS power to make regulations to suppress other (as yet unspecified) information from the public register.

Clause 21 provides that the protected information will be accessible, to any person or body with a public function which is specified in regulations to be made by BEIS. It will therefore presumably be accessible by law enforcement agencies in the UK and by HMRC. The draft Bill leaves open the possibility that the regulations might also provide for foreign agencies to access this information.

What are the practical implications of the Bill?

Entities which are registered will be subject to an updating duty each year. The sanction for failure to comply is a daily fine which, as the entities will usually be the registered proprietors of interests in land that can be enforced against, is likely to be an effective sanction.

The draft Bill provides for a new Schedule 4A to the Land Registration Act 2002, which will prevent overseas entities from applying to be registered as proprietor of a ‘qualifying estate’—namely of a freehold or of a lease for a term of more than seven years. Entering into the most common registrable dispositions of land, such as the grant of a legal charge, is similarly restricted.

Of great practical importance will be the effect on overseas entities which already own land in the UK. It is thought that in many new developments in London and elsewhere that many properties are already owned by foreign companies, and the draft Bill endeavours to address this specifically. All overseas entities that applied to be registered as proprietor of a qualifying estate on or after 1 January 1999 (in England and Wales) are—if they retain this land—required to become registered overseas entities (unless exempt) within 18 months of the commencement date of the new legislation, otherwise the entity and its officeholders will commit a criminal offence. In addition, clause 30 of the Bill gives BEIS a power to serve a notice requiring an overseas entity to become registered if it already owns certain land.

The draft Bill may also make litigating against overseas entities easier in procedural terms, if they happen to own land in the UK. Paragraph 2(1)(d) of Schedule 1 provides that part of the information required to be given is a service address. Paragraph 4 restricts the making of certain registrable dispositions including the grant of a legal charge, by preventing their registration and by making entering into such a disposition a criminal offence.

What impact might it have on real estate transactions and the real estate finance market?

In order to register title to land, an overseas entity will have to be registered with Companies House and comply with the updating duty. The economic assessment of BEIS forecasts costs of compliance in excess of £13m in the first year, and ongoing annual costs in excess of £2m. Particularly in the initial period of familiarisation, there is a prospect that the need to comply with the new regulations will discourage potential purchases by overseas entities. If persons seeking to hide illegitimate wealth have been using overseas entities to invest significant amounts in UK land, and if the policy objective of deterring this is achieved, then that may reduce demand in the real estate market.

However, it is possible that in the short term there will be an increase in activity, if beneficial owners are motivated to avoid the need for compliance with the new regime by disposing of UK land they own within the 18-month transition period.

Parties transacting with overseas entities will need to take care to ensure they are not negatively affected if the overseas entity is not registered. Although registrable dispositions entered into by overseas entities in breach of the requirements will not be invalidated, the inability to register them is potentially prejudicial. This will be of particular concern to lenders, whose need to make sure of the position may give rise to delays in obtaining finance.

It may be that direct ownership of UK land by overseas entities becomes less common, as it may prove easier to hold UK land via a UK company. However, one important consideration militating against that is that the draft Bill provides for personal data of individuals not to be accessible by the general public, while the PSC register offers less privacy.

Jonathan Edwards is a barrister at Radcliffe Chambers in London. His experience in company matters includes litigation in the Companies Court for payment of dividends, insolvency-related matters, for validation orders during winding-up proceedings, to rectify the register of shareholders and to restore dissolved companies to the register.

Interviewed by David Bowden.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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