The Economic Crime (Transparency and Enforcement) Act: What does it mean for commercial real estate?

The Economic Crime (Transparency and Enforcement) Act (the Act) was first introduced to Parliament as a Bill on 1 March 2022 and received Royal Assent on 15 March. Fast-tracked as part of the Government's response to the Ukraine conflict, which has given rise to an increased focus on the ownership of UK property by people potentially subject to sanctions, the Act will have a significant impact on commercial real estate. The main operative provisions of the Act have not yet come into force. However, it is clear the UK Government is motivated to see it take effect quickly and it is vital that you start planning now - as far as possible, given we do not yet have precise details of how the new regime will work - to deal with its effects.

Although this note focuses on the position in, and mainly uses terminology applicable to, England and Wales, the new Act applies throughout the UK

What does the Act say?

The Act establishes a new Register of Overseas Entities, to be maintained at Companies House. Any overseas entity which owns or plans to own a "qualifying estate" in UK property must apply to become a "registered overseas entity" on this register. To do this, it must submit details of its "beneficial owners" to Companies House (including, for individuals, personal details such as name, date of birth and residential address although some of this information will not appear on the public register), and this information must be updated regularly. Overseas entities which already own property in the UK have to become registered within 6 months from the date on which Companies House is first required to open the overseas register under the Act (this is known as the "transitional period", but the exact date is not yet known). That transitional period of 6 months has been substantially reduced from the original 18 month period when the Act was first introduced to Parliament.

A "qualifying estate" in England is a freehold or a lease of more than seven years. (In Scotland, the relevant property interests are ownership, and leases of more than 20 years.) The definition in the Act of "beneficial owner" is similar to that currently used in relation to the Persons with Significant Control (PSC) register which is maintained at Companies House in relation to UK corporate entities and Scottish legal partnerships and is, broadly, a person owning 25% or more of the shares or voting rights in that entity, or who has a right to appoint or remove a majority of the board of directors, or who exercises or is entitled to exercise significant control over that entity.

How will the Act prevent an overseas entity from disposing of its property?

Before the end of the transitional period, the Land Registry will place a restriction on every registered title owned by an overseas entity (provided that it acquired that property on or after 1 January 1999). The restriction will prohibit any “relevant disposition” (meaning, broadly, a transfer, a lease of more than 7 years or a legal charge) unless the overseas entity is a registered overseas entity at the time of the disposition (which means it must also have complied with the new annual updating duty) or is exempt. It is also worth noting that the restriction:

• does not affect the legal title to the property, only the ability to dispose of it;
• will only take effect at the end of the six month transitional period; and
• will contain carve outs for certain dispositions such as dispositions required to be made in pursuance of a statutory obligation, court order, contractual obligation pre-dating the restriction, a power of sale conferred on a secured creditor or receiver or a disposition by an insolvency practitioner.

(Restrictions will not be placed on titles in the Land Register of Scotland, but provisions with similar practical effect will take effect in relation to property (including leases of more than 20 years) acquired on or after 8 December 2014.)

If the restriction only takes effect at the end of the transitional period, can an overseas entity just sell its property before the end of the transitional period to avoid having to reveal the identity of its beneficial owners?

No. An overseas entity must disclose whether or not it has made a “relevant disposition” of qualifying property during the period from 28 February 2022 until the end of the transitional period. If it has, it will need to give details of the identity of its beneficial owners as they were immediately before the disposition. These provisions are intended to prevent entities from making a quick sale simply to avoid having to reveal beneficial ownership information.

Are there any exemptions?

There is no set list of exemptions from the Act as a whole. The only exemption is where the UK Government chooses to exempt an entity on the basis of national security or for the purposes of preventing or detecting a serious crime – and, as noted above, the restriction will also not apply to certain types of disposition (such as a sale pursuant to a statutory obligation or prior contractual obligation).

Penalties

Failure to comply with the Act is a criminal offence punishable by fines (the daily fine stands at £2,500 for both the overseas entity itself and each officer of it which is in default) which is a substantial increase from the £500 suggested in the original draft legislation; or, for some offences, imprisonment.

The Act unfortunately retains the rather unclear wording that we first saw in the draft legislation, stating that unpaid sums under the Act (presumably fines) may (in England) be secured by a charge over the property owned by the overseas entity and that the regulations introduced should include "provision about the priority of any such charge" – it is unclear how this would work in practice and we await further guidance from the UK Government.

What about trusts and nominees?

• Trusts: substantial amendments have been introduced to the Act in an effort to close perceived potential loopholes which would have prevented the Act from having the effect desired by the UK Government. The new provisions require that, where the beneficial owner of an overseas entity is a trust, information must be given about the trust, its trustees and also the beneficiaries of the trust as if they were beneficial owners of the overseas entity which owns the property.
• Nominee companies: A further loophole which was much debated, but which appears not to have been closed by the Act, relates to the use of nominees. The Act only captures beneficial owners of the entity which is the registered proprietor of the property, not beneficial owners of the property itself (which is a subtle but important difference). The example cited in the House of Lords debate perhaps best illustrates the point, so we have summarised it below:

If an individual sets up an overseas company to buy a property in the UK, they will be a beneficial owner of the overseas company so will have to disclose their identity under the Act. However, the individual could ask a professional services company/firm to buy the UK property for them using its general nominee company (which nominee company is an overseas entity which owns a large number of properties all beneficially owned by different people). The nominee company issues a declaration that it is holding the land as the individual’s nominee and that the individual is the beneficial owner of the property. In this case, the nominee company is the overseas entity which owns the property and the beneficial owner of the nominee company is the professional services firm which set it up, not the individual which is the true beneficial owner of the property. The declaration issued by the nominee company is private, so the individual remains anonymous.

We await further guidance and regulations which may close this loophole.

Practical steps

Whether you are an overseas entity or not, it is important to start thinking about and, as far as possible preparing for, the changes brought about by the Act.

Overseas entities which own or plan to acquire UK property will want to consider the following:

• Get ready to register: speak to your company secretarial teams and start pulling together information on the beneficial ownership of the overseas entities in your group in readiness for making an application to become a registered overseas entity.
• Register quickly: submit your application promptly - when Companies House opens the doors to receiving applications there will be a huge volume of applications and it is not yet clear what further support will be available to either Companies House or the Land Registry to help deal with the increased workload, so we would recommend getting in early.
• Check the Land Registry: to see if the restriction has been added to the registered titles of any properties you already own. The Land Registry is being asked to consider notifying registered proprietors when this happens, but we do not yet know whether this will be possible.

Non-overseas entities or persons should not ignore the changes. If you are:

• Selling to an overseas entity: the entity will not be able to become the registered proprietor until they have become a registered overseas entity. Legal title will therefore remain with you and your involvement in and liability for the property may continue past the usual registration gap. It is in your interest to ensure that an overseas buyer complies with its obligations under the new Act: ensure that you see evidence of registration as a registered overseas entity prior to completion.
• Lending to an overseas entity: lenders will want to ensure that borrowers are compliant with the Act; to do this, it will be necessary to include conditions precedent to drawdown evidencing due registration, which should be supported by warranties as to the accuracy of the information submitted and undertakings to comply with the ongoing updating duty.
• Involved in a landlord or tenant relationship with an overseas entity: you should be aware that certain notices (for example, in England, certain notices under the Landlord and Tenant Act 1954) need to be served by the legal landlord/tenant so it is important to ensure that your overseas entity counterparty is duly registered on the register of overseas entities.

Whilst the new Act supports the UK Government's plans to crack down on entities and people who are using UK property to launder money or may be caught by sanctions, it nevertheless presents an additional hurdle to legitimate overseas investors and anyone transacting with them. Our experts at DLA Piper are ready to help you prepare for these changes. Please contact one of our partners below if you require any assistance.

For further information on the Act, please see this.