The Register of Overseas Entities: what does it mean for commercial real estate in Scotland?

The Government's new Register of Overseas Entities opened on Monday, 1 August 2022 pursuant to the Economic Crime (Transparency and Enforcement) Act 2022. Restrictions in the Act on dealing with UK property came into force on Monday, 5 September 2022. The idea behind the phased commencement was to allow overseas entities a window in which to become registered on the new Register of Overseas Entities before the property restrictions took effect.

If your business is involved in selling, buying or leasing UK property through overseas entities, then the Act could apply to you. Although the Act applies throughout the UK, this note refers to the position in Scotland only. There are some differences that apply in England and Wales but the rules are generally similar to those described below.

A brief reminder: how does the Act affect Real Estate transactions?

In very broad and simplified terms, the Act requires an overseas entity to become a registered overseas entity (more on what this means below) in the following scenarios:

• it currently owns a qualifying estate (i.e. ownership, or a lease of more than twenty years from the date of grant which it acquired on or after 8 December 2014), in which case it must become registered before 1 February 2023¹;
• it wishes to sell, grant or assign a lease of more than twenty years, or grant a standard security (ie. legal charge) over a qualifying estate it already owns where the related application to the Land Register will be submitted on or after 1 February 2023; or
• it wishes to buy or become the tenant of a qualifying estate where its application to the Land Register is submitted on or after 5 September 2022.

Transactions made in breach of the Act will not be void, but will not be registrable at the Land Register. This is undesirable for both parties as it means that legal title to the land interest will not pass (so for example, an overseas entity would not become the registered proprietor of a property that it purchased if it had not first become a registered overseas entity). Failure to comply with many parts of the Act is a criminal offence and exposes the defaulting party to significant fines.

The Act does not restrict the sale or purchase of a property via the acquisition or disposal of the shares in the overseas property-owning company, although it would capture a standard security granted by that overseas company as part of the transaction. However, from 1 February 2023, any overseas entity which owns UK property must be registered on the Register of Overseas Entities and this registration would need to be checked before, and updated at the relevant time after, completion of such a share sale.

Finally, it is worth mentioning that if an overseas entity holds or purchases property through a UK entity (rather than through an overseas entity) the registration duties under the Act do not apply. However, UK entities cannot ignore the Act completely as the Land Register provisions will apply to any transactions undertaken with an overseas entity (more on this below).

How do I become a registered overseas entity?

You need to apply online to Companies House. The application requires you to file information about your beneficial owners and managing officers (as well as other details) and keep this information updated annually. A beneficial owner is, broadly, a person owning 25% or more of the shares or voting rights in that entity, or a person 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 or influence over the entity. Although, at first glance, the rules appear similar to the Persons of Significant Control register or anti-money laundering /client due diligence checks, the requirements are different and more onerous. Before you can submit your application, you have to:

• serve an "information notice" on each beneficial owner to confirm their details are correct, and you must give them one month to reply although there is nothing to prevent them replying earlier²; and
• ensure that the information in your application is independently verified (see below for more information).

Once the application is accepted, Companies House will issue a registered overseas entity ID number which serves as evidence of registration.

How can I get the information in my application independently verified?

The information in your application must be independently verified by a UK-based "relevant person" before submission. The definition of "relevant person" includes financial institutions, auditors, tax advisers, independent legal professionals and trust or company service providers (among others). The legislative definition is complex and a detailed analysis as to what constitutes a relevant person should be carried out (for example, an asset manager – whilst they may be independent – may not always fall within the definition).

The nature of the verification obligation is draconian. Verification must be conducted by reference to documents or information obtained from a reliable, independent source but the legislation is silent as to the level of due diligence that the verifier would be expected to carry out on these documents (and detailed due diligence in any case would be difficult for a UK relevant person to carry out in relation to an overseas entity). BEIS has published Guidance on registration and verification of overseas entities which gives some parameters around the level of verification they believe is required. The stakes are high for verifiers, who face criminal liability if they deliver (or cause to be delivered) materially false or misleading information to Companies House or make statements which are materially false or misleading.

Due to these onerous obligations, many relevant persons (including DLA Piper, in line with many other law firms) feel unable to provide verification and registration services under the Act at this stage.

DLA Piper is currently seeking to identify organisations who are willing to become independent verifiers. If you need assistance finding a relevant person to verify your application, please contact our Scotland Head of Real Estate below or your usual DLA Piper contact who will be able to provide the latest information we have. It is important that you make contact with a relevant person as quickly as possible so that you can submit your application to Companies House promptly.

Are there any transitional provisions when the Act first comes into force?

There is a six month transitional period, beginning on 1 August 2022 and ending on 31 January 2023.

Dispositions (ie dispositions, standard securities, leases, or assignations of lease) by an overseas entity in transactions which complete during this period can be registered at the Land Register (as long as the Land Register application is also submitted before the end of the transitional period) even if the seller/landlord is not yet a registered overseas entity. However, the seller/landlord still has a duty to file beneficial ownership information at Companies House in order to become a registered overseas entity by the end of the transitional period if it continues to own a qualifying estate. Failure to do so is a criminal offence. If it has made any dispositions which completed between 28 February 2022 and the end of the transitional period, it must also disclose details of those to Companies House³.

Acquisitions by an overseas entity do not benefit from the transitional period. From 5 September 2022, the buyer/tenant needs to be a registered overseas entity before it can apply to the Land Register to obtain legal title to the property it has acquired (even if the acquisition completes during the transitional period).

Are there any exemptions?

The Act provides for certain entities to be designated as exempt, but the Government has not yet made any such designations. There are also certain types of disposition that may be exempt, for example, dispositions by overseas entities completed pursuant to a contract entered into before 5 September 2022. (Again, please note that "disposition" includes the grant or assignation of a lease and the grant of a standard security (ie. legal charge).) There are no exemptions for acquisitions.

What are the penalties for non-compliance?

There are criminal sanctions for non-compliance with certain parts of the Act. Below is a table of the penalties that apply in some key areas:

Offence	Criminal liability	Penalty
Failure to register as a registered overseas entity by 31 January 2023 where required(Paragraph 10 , Part 2 of Schedule 4)	Yes (the entity and every officer who is in default)	(a) On summary conviction, for a term not exceeding (12 months) or a fine not exceeding the statutory maximum (or both); (b) on conviction on indictment, to imprisonment for a term not exceeding 2 years or a fine (or both).
Making a disposition if the Keeper of the Land Register of Scotland would be obliged to reject it because at the date of delivery of the relevant deed the overseas entity was not a registered overseas entity or an exempt overseas entity (section 112A and paragraph 2 of Schedule 1A of the Land Registration etc (Scotland) Act 2012 as amended by the Act)	Yes (the entity and every officer who is in default) In this context, officer includes a person in accordance with whose directions or instructions the board of directors or equivalent management body of an overseas entity are accustomed to act.	(a) On summary conviction, to imprisonment for a term not exceeding 12 months) or a fine not exceeding the statutory maximum (or both); (b) on conviction on indictment, to imprisonment for a term not exceeding 5 years or a fine (or both). (b) on conviction on indictment, to imprisonment for a term not exceeding 5 years or a fine (or both).
Failure to comply with the annual updating duty (section 8 of the Act)	Yes (the entity and every officer who is in default)	A fine not exceeding level 5 on the standard scale (GBP5000) and, for continued contravention a daily default fine not exceeding one half of level 5 on the standard scale; for continued contravention there is additional liability for officers in default in relation to the continuation offence even if they were not in default in relation to the original offence.
Failure of a registrable beneficial owner to respond to an information notice served by an overseas entity under section 12 or 13 without reasonable excuse or knowingly or recklessly giving false information in a material particular (section 15 of the Act)	Yes (the beneficial owner and, for beneficial owners which are entities, every officer who is in default). No offence is committed if the person can prove that the requirement to give information was frivolous or vexatious.	(a) On summary conviction, for a term not exceeding 12 months or a fine not exceeding the statutory maximum (or both); (b) on conviction on indictment, to imprisonment for a term not exceeding two years or a fine (or both).
General false statement offence of (without reasonable excuse) delivering or causing to be delivered information that is false, misleading or deceptive in a material particular; or making statements to the registrar which are false, misleading or deceptive in a material particular (e.g. to the registrar for registration). It is an aggravated offence if this is done knowingly (section 32 of the Act)	Yes: any person making such false statement	A fine not exceeding level 5 on the standard scale (GBP5000) and, for continued contravention a daily default fine not exceeding one half of level 5 on the standard scale; for continued contravention there is additional liability for officers in default in relation to the continuation offence even if they were not in default in relation to the original offence. (a) On summary conviction, imprisonment for a term not exceeding 12 months or a fine not exceeding the statutory maximum (or both); (b) on conviction on indictment, imprisonment for a term not exceeding two years or a fine (or both).
Failure to register as a registered overseas entity when required to do so pursuant to a Government notice (section 34 of the Act)	Yes (entity and every officer who is in default)	(a) On summary conviction, for a term not exceeding 12 months or a fine not exceeding the statutory maximum (or both); (b) on conviction on indictment, imprisonment for a term not exceeding two years or a fine (or both).
Failure to make a statement about dispositions made between 28 February 2022 and 31 January 2023 (section 42 of the Act)	Yes (entity and every officer who is in default)	A fine not exceeding level 5 on the standard scale and, for continued contravention a daily default fine not exceeding one half of level 5 on the standard scale; for continued contravention there is additional liability for officers in default in relation to the continuation offence even if they were not in default in relation to the original offence.

What action should I take now?

Now that the new Register is operational, there are some practical steps you can take – depending on what type of entity you are.

• Overseas entities acquiring property (urgent action may be required): get registered quickly. If your Land Register application is submitted on or after 5 September 2022 (even if the transaction completed before that date), you must be a registered overseas entity in order to obtain legal title to the property. Becoming registered quickly is vital. The two most important steps you can take now in order to save time are:
  • reach out to your beneficial owners to check the information you hold about them – this starts the clock running on the one month period for your beneficial owners to respond to the notice; and
  • try to make contact with a relevant person who can verify the information in your application. You can then prepare the other aspects of your application to help you make a swift application once you hear back from your beneficial owners. In the initial days and weeks after opening, registrations may take a little longer so the quicker you can apply, the better.
• Overseas entities which own land which they acquired on or after 8 December 2014 (ownership or a lease of more than 20 years): you must become a registered overseas entity by 31 January 2023 to avoid committing a criminal offence and thereafter comply with the annual updating duty⁴.
• Overseas entities disposing of UK property that they already own: get registered promptly so that you will be able to make dispositions on or after 1 February 2023. Also, start gathering information about dispositions you have made since 28 February 2022 (and any you make up to 31 January 2023), as details of such dispositions will need to be submitted to Companies House even if you no longer hold any UK property by the end of the transitional period on 31 January 2023⁵.
• Overseas lenders taking security over property: if you are an overseas lender, you will not have to become a registered overseas entity in order to take a standard security over a qualifying estate. However, you will want to ensure that overseas borrowers are compliant with the Act. For example, you may wish to include conditions precedent evidencing due registration, supported by warranties as to the accuracy of the information submitted and undertakings to comply with the annual updating duty throughout the life of the loan.
• UK entities contracting with overseas entities: even if you are not an overseas entity, if the counterparty to your transaction is an overseas entity you may wish to ensure that they are required to take steps to become a registered overseas entity and to produce evidence of such registration. This may need to be supported by additional warranties or undertakings. Your legal advisers can advise you as to the contractual provisions that are appropriate for your transaction.

The Act is complex and this note is only a simplified guide to some of the most important issues. The key to ensuring that you are on the right side of compliance is to get timely advice. Please feel free to get in touch with Drew Wallace, our Scotland Head of Real Estate, or speak to your usual DLA Piper contact.

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¹ In England and Wales the equivalent term of a lease is more than 7 years, and the equivalent acquisition date is on or after 1 January 1999.
² We expected that overseas entities would be required to use a prescribed form of notice but no such prescribed form has been introduced so we assume, for the time being, that any sensible form of notice which requests the information set out in section 12 of the Act will suffice
³ We anticipate that some purchasers may take a cautious approach and require overseas entity sellers/landlords to be registered in the Register of Overseas Entities in transactions which complete long before the end of the transitional period, in case of any unforeseen delays which result in the application to register the disposition not being submitted to the Land Register until on or after 1 February 2023.
⁴ In England and Wales the equivalent term of a lease is more than 7 years, and the equivalent acquisition date is on or after 1 January 1999.
⁵ We anticipate that some purchasers may take a cautious approach and require overseas entity sellers/landlords to be registered in the Register of Overseas Entities in transactions which complete long before 1 February 2023, in case of any unforeseen delays which result in the application to register the disposition not being submitted to the Land Register until on or after that date.