The Register of Overseas Entities is Go! What does this mean for lenders?

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:

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.)

In addition, any overseas entity which has disposed of UK property since 28 February 2022, must provide certain details to Companies House. This is the case even where that overseas entity no longer owns any UK property although how this will be monitored and enforced in reality remains to be seen. Given the complexity and size of the exercise in registering overseas entities which currently own UK property, one could be forgiven for thinking that extending the notification obligations to overseas entities which no longer hold any UK property may well be a step too far.

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.

Details of any disposition of UK property made since 28 February 2022 must also be provided.

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

Much depends on when the overseas entity became the registered proprietor of the Qualifying Estate.

Where an overseas entity acquires a Qualifying Estate on or after 5 September 2022, HM Land Registry will refuse to register title to the property unless the overseas entity is included on the Register. As such, to acquire any UK property on or after 5 September 2022, the overseas entity must be duly registered.

Where an overseas entity acquired a Qualifying Estate on or after 1 August 2022 but before 5 September 2022, HM Land Registry:

will register that overseas entity as the proprietor of the Qualifying Estate without the overseas entity being on the Register; but
will place a restriction on title in the land register, which will prevent the registration of any relevant disposition of that property (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) unless the overseas entity is listed on the Register (or an exemption applies).

Where an overseas entity was already the registered proprietor of a Qualifying Estate prior to 1 August 2022, HM Land Registry will place a restriction on title in the land register. Such restriction will take effect from 31 January 2023 (the end of the six-month transitional period) and will prevent the registration of any relevant disposition of the property unless the overseas entity is listed on the Register (or an exemption applies).

From a lender’s point of view, this means that where an overseas entity became the registered proprietor of a Qualifying Estate:

on or after 5 September 2022, the overseas entity will need to be on the Register in order to be able to register a legal charge at HM Land Registry;
between 1 August 2022 and 4 September 2022, the overseas entity will need to be on the Register in order to be able to register a legal charge at HM Land Registry; and
prior to 1 August 2022, a legal charge can be registered at HM Land Registry without the overseas entity being included on the Register until 31 January 2023, although an application to register must have been made by this date and details of the legal charge will need to be disclosed at the time of application.

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?

As mentioned, any overseas entity acquiring a Qualifying Estate on or after 5 September 2022 will need to be on the Register before the acquisition can be registered at HM Land Registry.

Although an overseas entity which acquires a Qualifying Estate between 1 August 2022 and 4 September 2022 will not need to be on the Register for the purposes of the acquisition, it will need to be registered if it wishes to make any relevant disposition of the land and it must in any event have applied for registration by 31 January 2023.

Any overseas entity which held a Qualifying Estate prior to 1 August 2022 is required to apply to register by 31 January 2023.

Non-compliance

The penalties for non-compliance can be severe and failure to register or to comply with the annual update requirements will prevent the completion of property-related transactions. 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

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, although if they acquired the property between 1 August 2022 and 4 September 2022, they will need to be on the Register to make a relevant disposition of that property. 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 before 5 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.

Important dates

28 February 2022: details of any relevant disposition of land since this date must be disclosed to Companies House

1 August 2022: Register becomes effective although the property-related provisions are not yet in force

5 September 2022: property-related provisions take effect.

31 January 2023: end of transitional period. Restrictions on title placed on the land register for overseas entities which owned UK property prior to 1 August 2022 take effect

Disclaimer

This note reflects the law as at 11 August 2022. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.

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