Update on the Trust Registration Service

• 18 May 2020
• News

The EU Fifth Anti-Money Laundering Directive (5AMLD) has been enacted into UK law with effect from 10 January 2020, with the exception of proposed changes to the Trust Registration Service (TRS). These changes were delayed to permit a technical consultation on the draft legislation to take place between 24 January and 21 February 2020. The Government’s response to this consultation is still awaited.

The TRS was first enacted in 2017, with registration requirements introduced from 2018. The TRS requires trustees to collect, maintain and keep updated details about trusts, including information about the settlor, the beneficiaries and the trust fund. Under current rules, registration is generally required when a trust has a UK tax liability.

Proposed expansion of the TRS

The proposed changes to the TRS resulting from 5AMLD would significantly increase the scope of trusts that will require registration.

It is suggested that trusts entering into a business relationship in the UK or holding UK real estate will need to be registered. Particular concerns have been raised about the former, in case such a requirement deters trustees from obtaining expert advice about possible tax liabilities.

It may also be that all bare trusts, including those routinely used in connection with life insurance or for minor children, could be included. Where exemptions are proposed, such as for trusts for vulnerable beneficiaries, there are concerns that these will be too tightly defined. Depending on the precise details, the rules may require many low value and low risk family arrangements to be registered.

There are currently understood to be about 200,000 trusts that require registration. It is estimated that this may rise to as many as 2 million subject to the precise nature of the measures to be introduced pursuant to 5AMLD. This clearly imposes a significantly greater compliance burden on trustees.

Under the current proposals, unregistered trusts in existence on 10 March 2020 will need to be registered by 31 March 2021. The proposed deadline for new trusts is 30 days from the date on which they are settled.

Proposed expansion of access to the TRS

Under the existing rules, access to information on the TRS is reserved to law enforcement agencies. The 5AMLD proposals provide for increased access to be extended to those with a “legitimate interest” in the beneficial ownership of a trust. The government proposals state the intention that access will only be given where this furthers work to counter money laundering and terrorist financing, and that applications will be rigorously reviewed on their merits. However, it is unclear how this review process will work, and how adherence by the applicant to their stated aims will be monitored.

Furthermore, in circumstances where trustees have a controlling interest in a non-EU company or other entity, the draft rules do not require an applicant to demonstrate a “legitimate interest” in order to access information on the TRS register. While there is provision to ask applicants for information to support their request, this is not mandatory. Concerns have been raised in response to the technical consultation about this and other aspects of the proposals, and it is to be hoped that the draft legislation will be amended to take accounts of the issues raised.

Timing

In light of the COVID-19 crisis, requests have been made for the implementation of the new rules to be delayed due to difficulties in registering a potentially very large number of trusts. A response to this request is still awaited. In the meantime, on 14 May the European Commission (EC) sent the UK (together with a number of member states) a letter of formal notice regarding its failure to fully transpose 5AMLD into UK law. The UK has four months to provide a satisfactory response to this letter, failing which it may advance to the next stage of enforcement proceedings (a “reasoned opinion” from the EC). It remains to be seen how the UK Government will react to this letter. However, whether or not implementation of the TRS provisions is delayed further, it is anticipated that the new TRS rules will be introduced eventually, in spite of the UK’s departure from the EU.

Forsters’ Regulatory Group

The Regulatory team advises trustees, other fiduciary service providers, companies and individuals about their obligations under the UK’s ever increasing regulatory framework and the global reporting issues that they need to consider.

This area is becoming increasingly complex and the penalties, both financial and otherwise, for non-compliance are significant. Relevant rules and regulations include (but are not limited to) the Common Reporting Standard, the Trust Registration Service and the Register of Persons with Significant Control. The team advise on the issues that need to be considered, including the information that affected persons must collect, maintain and report, and the form that reporting should take. They also advise on how to proceed when required reporting has not been done.

If you have any questions prompted by this note, or on any related matter relevant to you, please get in touch with a member of the Regulatory team.

The End of Leaseholder Alterations?: The Supreme Court Decision in Duval

• 7 May 2020
• News

Those in the leasehold world have been waiting with bated breath for the Supreme Court’s Decision in Duval v 11-13 Randolph Crescent Ltd. [2020] UKSC 18 (6 May 2020) (“Duval”) to provide guidance on a landlord’s liability when granting consent to leaseholders to carry out structural alterations.

In Duval the Supreme Court held that where a lease contains landlord covenants for all leases to be in substantially the same form and an obligation on the landlord to enforce leaseholder covenants upon the request of another leaseholder, a landlord will be in breach if it gives consent to a leaseholder to carry out works in breach of an absolute covenant.

Absolute and Qualified Covenants

In order to understand the ramifications of this decision, it is first necessary to consider the difference between a qualified or absolute leasehold covenant:

1. Qualified covenants: in most residential long leases, there will be a covenant for the leaseholder not to undertake works to their own premises without permission from their landlord. In accordance with section 19(2) of the Landlord and Tenant Act 1927, such consent cannot be unreasonably withheld.
2. Absolute covenants: residential long leases will also often contain a covenant prohibiting the leaseholder from undertaking any work to the structural elements of the building or any other areas which fall outside of their demise. Such a clause will not provide for the landlord to allow these works by consent. However, landlords will often give consent to leaseholders for such works, in exchange for a premium.

The Decision in Duval

The facts of Duval will seem familiar to many as this case arose from a fairly common set of circumstances. The block in question is a terraced house which had been converted into nine flats. Mrs Winfield was a leaseholder of one of those flats and applied for permission from the landlord to carry out works to her flat, including the removal of a substantial part of a load bearing wall at basement level. It was agreed by the parties that the works proposed would amount to a breach of clause 2.7 of the leases, which contained an absolute covenant against structural alterations. Upon learning of these plans, another leaseholder in the building, Dr Duval, objected. This ultimately led to Dr Duval issuing proceedings against the landlord for a declaration that the landlord was not permitted to give consent to the works.

Dr Duval relied on clause 3.19 of the leases, which contained a covenant on the landlord to ensure that each lease contained similar covenants and stated that the landlord would enforce any leaseholder covenants at the request of another leaseholder, subject to that complainant leaseholder indemnifying the landlord’s costs.

The Supreme Court decided that clause 3.19 did not expressly state that the landlord was prevented from giving Mrs Winfield permission to carry out the structural work but such a prohibition must be implied into the clause. In his Judgment, Lord Kitchin stated that clause 3.19 would have no practical effect if the landlord was able to authorise a breach of the covenant and thereby prevent the complainant leaseholder from asking the landlord to enforce the breach.

Is it still Possible for a Landlord to Grant Consent for Works?

If works are contemplated for a leasehold flat, it is clear that the landlord and leaseholder will now need to carefully consider whether Duval applies.

In light of Duval, a landlord will be in breach if consent to works is given in the following circumstances:

1. The works are prohibited by an absolute covenant;
2. The leases contain a clause that all leases will contain similar covenants; and
3. The landlord has covenanted to enforce leaseholder covenants at the request of another leaseholder.

It will clearly be necessary to consider carefully exactly what is proposed and this could lead to potentially difficult questions about the extent of a leaseholder’s demise. It is clear that Lord Kitchin thought that leaseholders should be able to prevent works which “go beyond routine alterations and improvements and are intrinsically such that they may be damaging to or destructive of the building”. However, it seems that the decision may prevent fairly routine alterations and improvements.

What happens if a leaseholder wishes to knock down a non-structural wall in their flat but an absolute covenant in their lease prevents such works? This type of work does not appear to be what the Supreme Court sought to prevent but arguably it would not be possible for a landlord to consent to the same without finding themselves in breach.

It is possible for the landlord to obtain consent from all of the leaseholders to the proposed works before providing consent themselves. This may be simple in smaller blocks and where the landlord is a leaseholder entity. However, this will clearly present difficulties in larger blocks or in blocks where there is one or more leaseholders that objects to the proposals.

Finally, a brave landlord may continue to provide consents for works where Duval applies on the basis that any breach would result in little or no loss to the leaseholders. If this approach is taken, it would seem sensible to seek an indemnity from the leaseholder asking to carry out the works for any claims that may be brought by an aggrieved leaseholder.

This is probably not the end of leaseholder attempts to carry out alterations but careful consideration will clearly be necessary and we recommend that advice is obtained.

If you require further clarification or advice please contact Lucy Zaremba of Forsters LLP.