The register of overseas entities (the Register) which was created pursuant to the Economic Crime (Transparency and Enforcement) Act 2022 (the ECA) went live on 1 August 2022. As such, overseas entities can now apply to Companies House to register, although property transactions will not actually be affected until 5 September 2022. So, what does this mean for lenders? Here, we provide an update and suggested practical steps.
Who must apply to the Register?
Any body corporate, partnership or other legal entity which is governed by the laws of a country outside of the UK (an overseas entity) that:
- as at 1 August 2022, owns a UK freehold interest or a lease exceeding seven years (a Qualifying Estate) which was acquired after 1 January 1999; or
- intends to acquire a Qualifying Estate,
must apply to the Register.
(Overseas entities that do not own or intend to acquire a Qualifying Estate may choose to be listed on the Register, but this is not a legal requirement.)
Upon registration, Companies House will confirm due entry in the Register and provide the overseas entity with a registration number.
What information must be submitted to the Register?
An overseas entity is required to provide certain information about itself (including its name, country of incorporation or formation and registered office) and identify its registrable beneficial owners (or confirm that it does not have any) to the Register. Such information must, on an annual basis, be updated or confirmation given that no update is required.
Where the overseas entity does not have any registrable beneficial owners, it must instead give details of its managing officers.
Any overseas entity which currently owns a Qualifying Estate must, in its application to the Register, provide details of any disposition of UK property made since 28 February 2022.
The information to be submitted in the application for registration must be verified by a UK-regulated agent and their details must also be provided. Various service providers such as accountants and law firms can apply to take on this role but in so doing, will also take on various risks and responsibilities. It remains to be seen how many choose to do so.
Although the Register will be publicly available, certain information, such as the residential address and date of birth of individuals will be kept confidential.
What is a registrable beneficial owner?
Essentially, a beneficial owner is anyone who:
- holds, directly or indirectly, more than 25% of the shares or voting rights in the overseas entity
- holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of the overseas entity
- has the right to exercise, or actually exercises, significant influence or control over the overseas entity
- has the right to exercise, or actually exercises, significant influence or control over the activities of a trust, and the trustees of such trust meet any of the conditions specified above in relation to the overseas entity.
There is a specific carve-out in respect of share charges which provides that the rights attaching to the charged shares will be held by the chargor if the rights (other than the right to exercise them for the purpose of preserving the value of the security, or of realising it) are exercisable:
- in accordance with the chargor's instructions; and
- (where the shares are held in connection with the granting of loans as part of normal business activities) only in the chargor's interests.
As such, a lender will not be deemed a beneficial owner solely because a share charge has been granted to it.
Property transactions and legal charges
Any purchase or relevant disposition of land, i.e. a transfer, grant or assignment of a lease for a term of seven years or more, or the grant of a legal charge, in respect of a Qualifying Estate by an overseas entity will not be possible on or after 5 September 2022 unless the overseas entity is listed in the Register.
HM Land Registry will place a restriction on title to any Qualifying Estate in the land register. Such restriction will prevent the registration of any relevant disposition of land unless HM Land Registry has seen evidence that entry to the Register has been made (or that an exemption applies). In the case of a purchase, HM Land Registry will need to see evidence of registration from an overseas entity purchaser to register title to the Qualifying Estate.
From a lender's point of view, this means that a grant of a legal charge over a Qualifying Estate owned by an overseas entity will trigger the registration requirements. Therefore, in order to be able to register a legal charge at HM Land Registry on or after 5 September 2022, the overseas entity will need to be on the Register.
Enforcing a registered legal charge however, is a different story as it falls within one of the exemptions. Where a secured creditor (or a receiver appointed by the secured creditor) exercises its power of sale under a registered legal charge or a disposition is made by a specified insolvency practitioner in specified circumstances, the lack of registration by the relevant overseas entity will not prevent such sale or disposition.
What is the deadline for registration?
Any overseas entity which held a Qualifying Estate on 1 August 2022 is required to apply to register by 31 January 2023 but where a relevant disposition of land is to take place on or after 5 September 2022, the relevant overseas entity must be duly registered prior to completion in order that the appropriate entries can be made in the land register.
The penalties for non-compliance can be severe. Any overseas entity which is not listed on the Register may not acquire or dispose of a Qualifying Estate on or after 5 September 2022. In addition, failure to register on time or to comply with the annual update requirements are criminal offences.
For more information about the Register and how it will affect lenders, see our previous articles.
What should lenders be doing now?
The main effect on lenders is the ability to register a legal charge at HM Land Registry on or after 5 September 2022. This will not be possible unless the overseas entity is listed on the Register at the time the application to HM Land Registry is made.
- Be aware that overseas borrowers which currently own UK property should now be applying to register and will have until 31 January 2023 to do so. You may want to amend their ongoing obligations in the facility documentation to ensure that they provide you with confirmation that such registration has taken place and evidence that they have complied with their annual update obligations.
- Any facility agreements and related security documentation which are currently being negotiated for completion between 1 August and 4 September 2022 should include an obligation on the overseas entity borrower to apply for registration promptly after completion, to comply with the Register's annual update requirements and to provide you with evidence that they have done so.
- If you are currently dealing with any facility agreements and related security documentation for completion on or after 5 September 2022, you should ensure that the overseas entity borrower is listed on the Register prior to completion. Failure to do so may hold up completion as HM Land Registry will not be able to make the appropriate entries in the land register, including registration of any legal charge over the Qualifying Estate. The documentation should also include undertakings that the borrower will comply with the Register's annual update requirements and provide you with evidence that they have done so.
28 February 2022: details of any relevant disposition of land since this date must be disclosed in an overseas entity's application to register.
1 August 2022: overseas entities which held a Qualifying Estate as at this date are required to register.
5 September 2022: property-related provisions take effect. Any overseas entity which acquires a Qualifying Estate or makes a relevant disposition of land (including the grant of a legal charge over the Qualifying Estate) on or after this date must be listed on the Register at the time the application is made to HM Land Registry.
31 January 2023: deadline for registration applications from overseas entities which held a Qualifying Estate as at 1 August 2022.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.