Update on the implications of the Economic Crime Act for real estate

Alert: On 22 July 2022 it was announced that the land registration elements of the Economic Crime (Transparency and Enforcement) Act 2022 will come into force on 5 September 2022 – the effect of this includes that there is an additional 5 weeks in which an application may be made to the Land Registry to register an overseas entity as the owner, even though at the time of the application the entity is not registered on the Companies House overseas entities register.

Note: While the Economic Crime (Transparency and Enforcement) Act 2022 affects the United Kingdom, this update focuses on England and Wales.

Summary

There have been some important recent developments with the Economic Crime (Transparency and Enforcement) Act 2022 including an intended go-live date for the new Companies House register to record who owns or controls an overseas entity that is or is entitled to be the registered proprietor of property at the Land Registry.

Context

We have previously highlighted the impact of the Economic Crime (Transparency and Enforcement) Act 2022 (“Act”) – see Real estate changes in Economic Crime (Transparency and Enforcement) Act 2022 (cms-lawnow.com), The Economic Crime (Transparency and Enforcement) Act – what this will mean for real estate lenders (cms-lawnow.com) and Focusing on Funds - New Register for overseas legal entities and their owners holding UK real estate (cms-lawnow.com).

The Government last week announced that it intends that the Companies House register will go live on 1 August 2022. The transitional period referred to in our previous Law-Now’s runs from then and will expire on 31 January 2023. There have also been some recent statutory instruments, which provide important detail on the verification requirements for the information provided to Companies House. This Law-Now addresses the position from the intended go-live date of 1 August.

Triggers for Companies House registration

There are a number of triggers for when an overseas entity must register at Companies House:

• If an overseas entity buys a freehold or leasehold property (lease granted for more than seven years) or takes a grant of a lease for more than seven years, no application may be made to the Land Registry to register the entity as the owner, unless at the time of the application the entity is registered on the Companies House register. Making such an application without the Companies House registration will cause the Land Registry application to be cancelled. Since the register is being launched in the next few weeks and there will be complexities involved in the registration (see Companies House registration process), it is important to ensure that sufficient time is allowed so as not to prevent or delay the Land Registry application being made, which would increase the possibility of other transactions affecting the property being registered at the Land Registry in priority to the entity’s transaction.
• The following situations will require the overseas entity within the aforesaid transitional period to apply to register itself in the overseas entity register at and provide certain information to Companies House, otherwise an offence may be committed. The situations are where the entity:
  • Sells, charges or leases for more than 7 years its property registered at the Land Registry within the period commencing on 28 February 2022 and ending at the end of the transitional period. This seeks to capture an overseas entity which disposes of its UK property during the transitional period and would otherwise avoid disclosure of relevant information to Companies House.
  • Is the registered proprietor at the Land Registry.
  • In both of the above situations, the application to Companies House must be made before the end of the transitional period. The legislation does not apply in either of the above situations if the entity was registered at the Land Registry before 1 January 1999.

Land Registry restriction

• The Land Registry will enter a restriction on those titles that are in the name of an overseas entity (unless the entity was registered before 1 January 1999). The restriction will not take effect until the end of the transitional period and will prohibit the registration of a sale, charge or lease for more than 7 years, unless the overseas entity was registered in the Companies House register at the time of the transaction. There are certain other exceptions including where the transaction was pursuant to a contract made before the restriction was entered on the title.
• If an overseas entity, that is entitled to be but is not registered at the Land Registry, itself sells, charges or leases for more than 7 years registered land, then similar constraints on registration will apply (although there will not be the equivalent of the transitional period).
• The entity and its officers commit an offence if the entity enters into such transactions in breach of those restrictions.

Companies House registration process

There are three key aspects to registering the overseas entity on the new Companies House register:

• prescribed information must be provided to Companies House about the entity, its registrable beneficial owners (including, where a registrable beneficial owner is a trustee, about the trust) and, where applicable, its managing officers. Our briefing linked here Focusing on Funds - New Register for overseas legal entities and their owners holding UK real estate (cms-lawnow.com) gives further detail on the required information, which must be kept updated annually.
• a so-called “relevant person” (known as a “supervised agent” because they are supervised under Money Laundering Regulations) must have verified the information mentioned above and provide Companies House with a statement within a tight timeframe, including a confirmation that the agent has undertaken the verification; and that the verification complies with the statutory requirements. The supervised agent can be a wide range of people/entities including credit and financial institutions; auditors, insolvency practitioners, external accountants and tax advisers; independent legal professionals (so not an in-house lawyer at the overseas entity); trust or company service providers; and estate agents and letting agents (with certain exceptions including a family member or known close associate of an individual beneficial owner). Importantly, all of them must be acting in the course of business carried on by them in the United Kingdom. Companies House say that it will be quicker and easier for the supervised agent to register the information on the overseas entity’s behalf with Companies House, as well as doing the verification. Consideration will need to be given to who will provide this verification. The supervised agent will need to contact Companies House to obtain an assurance code before they can verify or file on the overseas entity’s behalf and further details on that are awaited.
• the overseas entity must give an information notice to each beneficial owner of the entity requiring them to state whether or not they are a beneficial owner and to confirm, correct or supplement the information about them in the notice. The beneficial owner has up to one month to respond. The overseas entity must undertake this before an application is made to register at Companies House.

Once entered on the Companies House register, the entity is given an “overseas entity ID number”, which will be important when dealing with its registered land. The legislation does not affect overseas individuals owning UK property directly or through a UK entity. While the legislation refers to “exempt” overseas entities, there are none such currently.

It is important to bear in mind that failure to comply with the legislation is potentially a criminal offence both for the entity and its officers, punishable by a fine and/or imprisonment of up to 5 years.

Actions

• Be prepared to make the necessary Companies House filings following the Triggers for Companies House registration and Land Registry restriction.
• Ensure that the three key aspects of the Companies House registration process can be fulfilled (see Companies House registration process), including deciding who will provide the verification and remember that there may be a time lag in obtaining the beneficial owner’s confirmation.
• Certain protections for the Act will need to be included in transactional documents where an overseas entity is a party.