New beneficial ownership register of entities holding UK property – as clear as mud?
When, in September 2015, Private Eye published their online map of properties in England and Wales owned by overseas companies, few would have suspected that those companies might be compelled to maintain a register similar to the People with Significant Control (PSC) register kept by UK companies. The proposal will affect conveyancing and due diligence where an overseas entity is buying or selling property (i.e. freeholds and leaseholds over 21 years).
Why?
The existing PSC register reveals who owns and controls UK companies, and so by extension is intended to reveal who reaps the benefits of the underlying assets. Equivalent information is not currently available for foreign companies, many of whom own real property in the UK. The proposed new register is intended likewise to reveal the 'true' owners of UK property, ostensibly so as to prevent the laundering of money through property transactions. In reality of course the proposed register would prove a burden to those who are compliant anyway, might perhaps cause some embarrassment to any individuals revealed to be wealthier than they are already known to be, and would leave seasoned criminals entirely unaffected.
What will the new register look like?
Like the PSC register, the new register will be hosted by Companies House and will be freely accessible. It will apply to all legal entities which own property, not just to companies.
The government is suggesting that the definition of beneficial owner should correspond with the definition employed in the PSC register regime.
Why submit information to the new register?
The government intends to ensure that overseas entities cannot buy or sell property in the UK unless they have provided information about their beneficial owners.
An overseas entity wishing to buy property will not be able to register its title without a beneficial ownership registration number from Companies House.
Overseas entities already owning property who do not wish to comply with the new regime will have a year, the government is suggesting, to dispose of their property. If they still hold property at the end of that year, they will not be able to dispose of it unless they have become compliant.
How will this work in practice?
A note will be automatically placed on the title register to the effect that the overseas owner may not sell, create a long lease or register a charge over the property unless it has complied with the new register requirements. To ensure compliance, the government proposes that it should be a criminal offence to fail to provide the required information or, once provided, not to meet the updating requirements.
What happens if a party fails to abide by the rules?
So what if a transaction has taken place but no registration number is provided to the Land Registry by the overseas buyer? The government's answer is that the transfer will simply be void. This will be a serious consequence as the buyer will have paid the purchase price but will receive no interest in the property at all.
How frequently will overseas entities need to update their information?
The government has acknowledged that a requirement to update every time there is a change in beneficial ownership would be too onerous. Instead, it is proposed that there should be an obligation to update every two years, with it being a criminal offence not to do so.
What about lenders wishing to enforce their security?
If a lender has security over a property owned by an overseas company, then it should not be prevented from enforcing that security simply because the property owner has not complied with the register requirements.
The government recognises that it might be unreasonable to prevent a lender enforcing its security merely because it is not, at the relevant time, compliant. However, it is concerned not to create a loophole whereby an overseas corporate "buyer" could have a charge over the property and enforce its security without itself being compliant, so it has proposed that "legitimate lenders" should be able to enforce security without becoming compliant. Whether the government can provide a workable definition of 'legitimate lender' remains to be seen.
Will it work? What are the issues?
Forsters has submitted a response to the consultation. We believe the government has overlooked a number of issues, particularly when it comes to the proposed penalty of voiding the transfer.
Preventing beneficial title passing would, in our view, result in unfairness; an overseas buyer could pay for, and believe to have purchased, a property, but not be entitled to the rental income from it or to have any interest in it whatsoever simply because it has (perhaps inadvertently) failed to comply with the registration requirements. If the transaction were one of a 'chain', the money might well have left the seller's control before the problem was discovered. This could result in fraught and lengthy litigation to recover the funds.
What will happen to a long lease where a valid registration number has not been obtained prior to completion? Again, this would have serious repercussions for a party which believed that it had acquired a leasehold interest, and would also cause issues for related parties such as undertenants who would not know who their legal landlord was for the purpose of serving notices and paying rents.
What next?
The consultation closed on 15 May 2017, and we must wait and see whether the government takes on board our concerns, and those of many others in the industry. In the meantime, if you would like advice on the existing PSC regime or to speak to us about holding property through an overseas structure, please get in touch.