Proposed New Disclosure Regime for Overseas Entities Owning UK Real Estate

June 20, 2017

A significant development is afoot which will impact foreign investors in UK real estate. Aside from the benefits of a stable and liquid real estate market in the UK and a favourable legal/tax regime, foreign investors have always been able to preserve their anonymity. That is about to change.

The Government has signalled its intention to require overseas owners of UK real estate to publicly disclose their identity, in much the same manner as is the case with disclosures of owners of shares of UK companies (a change introduced in 2016). If implemented, the rules would require public disclosure of beneficial ownership of all entities engaged in buying, selling and financing UK real estate. Overseas entities that already own interests in UK real estate would be given 12 months to comply. At present, the proposal is in consultation and there is no fixed schedule for the enactment of enabling legislation.

The Department of Business, Energy & Industrial Strategy ("BEIS") announced a call for evidence in April 2017 on the nature and a scope of a register which would be established to record who owns and controls overseas legal entities that own UK real estate. Responses to the call for evidence closed on 15 May 2017.

BEIS expects that the proposed UK register for overseas entities will closely follow the regulations of the "persons with significant control" register (the "PSC Register") that already apply to UK companies, thus closing a loophole perceived by the Government in the overall beneficial ownership disclosure regime that operates in the UK.

What is the proposal?

In order to buy, sell, charge (i.e., grant a mortgage or security over), or grant a long lease of property in the UK, an overseas entity would be required to: (i) provide details to Companies House with information on the beneficial ownership of the overseas entity; and (ii) apply for a registration number.

Registration of an effective transfer of any interest in UK real estate with the Land Registry will not be possible without a valid registration number. This means that an overseas entity that wishes to deal in property in the UK will not be permitted to do so without securing a valid registration number and ensuring that its interest in UK Property is properly noted in the register.

Overseas entities that already own UK real estate will have a 12-month transitional period to apply for and obtain a registration number. Criminal sanctions are being considered as part of enhancing the enforcement of the regime (similar to the existing treatment that makes it a criminal offence to knowingly or recklessly provide false or misleading information to Companies House to comply with a filing obligation).

Who is covered?

All overseas entities, not just companies (i.e., body corporates, corporations, partnerships and trustees, etc.), that seek to buy, sell, charge (i.e., grant a mortgage or security over), or grant a long lease of property in the UK.

What falls within the scope of UK real estate?

Freehold property in the UK and leases of UK real estate with an initial term of more than 21 years (where the lease is required to be registered with the Land Registry – no further distinction is made between commercial and residential property in the proposal).

Does this affect both registered and unregistered land?

Notwithstanding that the UK has had a system of mandatory land registration since 1925, not all land in the UK is currently registered (BEIS estimates that 17% of freehold land in England and Wales is unregistered). Any unregistered land currently owned by an overseas entity will not be subject to the new register requirements. However, as a transfer of unregistered land triggers registration, the proposals will apply to overseas entities buying unregistered land (which will become registrable on completion).

Who is the beneficial owner?

The individual (or individuals) who ultimately benefits from the legal entity and who exercises control over it and the assets it holds.

If ownership involves "chains" of intermediate entities, where another legal entity, rather than an individual, is the beneficial owner, the disclosure of all beneficial ownership up the ownership chain may be required until the ultimate individual beneficial owner(s) is/are disclosed.

The UK government’s proposal is that the definition of beneficial ownership closely follow that used in the PSC Register for UK companies. Generally, the PSC Register requires disclosure of beneficial ownership by persons that (i) directly or indirectly hold more than 25% of the shares or voting rights, or (ii) have appointment or removal rights over a majority of directors, or (iii) exercise or have significant influence or control over the company or a trust or partnership, if that company/trust/partnership would be a disclosable beneficial owner.

How will the new register work?

Application for registration requires details of the beneficial ownership of the overseas entity to be disclosed to Companies House. If the application is successful, Companies House will allocate a registration number to the overseas entity.

Companies House, like the PSC Register, will make the beneficial ownership information publicly available free of charge through its website.

Registration of title to UK real estate will be prohibited without a valid registration number.

Reported beneficial ownership information will need to be updated at least every two years. Changes of control above or below the reporting thresholds in the interim period would not trigger an immediate updating requirement. Overseas entities will need to include all information about all changes in beneficial ownership since the last update filed report.

How will this affect UK real estate already owned by overseas entities?

Overseas entities will have 12 months to apply for registration number. At expiry of the 12-month period, any overseas entity owning property in the UK will be prohibited from selling the property or granting a long (21+ years) lease or legal charge over it, if they have not complied with the new register’s requirements.

What information of the beneficial owner will be included in the new register?

The proposal is to follow as closely as practicable the PSC Register information requirements that currently apply to beneficial owners of shares in UK companies (i.e., name, date of birth, nationality, service address, residential address (will be disclosed to Companies House but not made publicly available), country or state where they usually reside, nature of its control of the overseas entity, date that control was acquired).

The UK government would implement a protective regime allowing an individual to keep confidential certain information in limited circumstances, such as where disclosure of such information would put the individual at risk of violence or intimidation.

Are there exceptions?

In limited circumstances, an overseas entity may be permitted to state that it is unable to provide beneficial ownership information (e.g., it has not been able to confirm beneficial ownership information with the beneficial owner despite taking reasonable steps to do so or it has not been able to establish if there are any beneficial owners or there are no disclosable beneficial owners because all persons hold 25% or less of the shares, voting rights, etc. in the overseas entity). It will be an offence for anyone to knowingly or recklessly provide misleading or false information. Where overseas entities are unable to give beneficial ownership information, as a substitute they will be required to disclose information about their managing officers instead.

The proposal acknowledges the need to avoid duplicative or double reporting (for instance if a beneficial owner of an overseas entity is required to publicly report equivalent beneficial ownership information in its home or other country). For example, where an overseas entity has a UK company as a beneficial owner, the overseas entity would disclose the UK company as a beneficial owner but need not disclose further "up" the chain, as that information will be included in the PSC Register of the UK company.

What are the implications of the proposed register and next steps?

The proposals are still in the process of consultation. The comment period closed 15 May 2017 and the comments are being assessed by BEIS. It remains to be seen whether the proposals will remain a priority of the new minority Government.

Looking ahead:

Overseas entities may want to review their constitutional documents (including shareholders’ agreement and similar agreements) and consider including provisions allowing the overseas entity to request and receive up-to-date beneficial ownership information from its beneficial owners on a periodic basis. Investment funds, etc. with a base of significant or a concentration of equity holders (meeting the threshold disclosure requirements) should consider targeting any such significant shareholders with supplemental agreements in which those equity holders agree to provide beneficial ownership information.
The information requested by the proposed register would need to be excluded from any confidentiality obligations in any arrangements between the beneficial owner and the overseas entity and the overseas entity would need affirmative authority to disclosed confirmed beneficial ownership information in compliance with the proposed disclosure regime.
A seller of UK real estate to an overseas entity will want to take steps to confirm that the overseas acquiring entity has a valid registration number sufficiently in advance of completion. A side effect of the proposal may be that parties consider more robust contractual remedies for failure to close, including larger deposits or additional circumstances in which the deposit is forfeited to the seller.
A buyer or lessees (of a long lease) of UK real estate from an overseas entity will want to ensure that the title to the UK real estate will be registered by the Land Registry, and that any overseas entity holding the UK real estate has the details of its beneficial ownership registered before exchange of the property contract / long lease.
The proposal acknowledges that the restriction on title to UK real estate (which seeks to prevent transfers in cases where the registration requirements have not been met) should not prevent lenders from enforcing their security. The proposals intend to allow an existing lender to enforce and sell UK real estate to any entity (with or without regard to registration) to recover its debt. However, there are still practical difficulties. The Loan Market Association, in its response on the BEIS call for evidence,[1] stated that legitimate lenders and receivers that should be entitled to rely on any provisions enabling the exercise of security and sale of UK real estate securing a loan free from a title restriction for lack of beneficial ownership reporting compliance. There are a number of alternatives that a secured party may chose in an enforcement scenario and any enabling provision will need to accommodate a wide variety outcomes (balanced against the Government’s stated need to ensure no loophole is created that allows an overseas entity to obtain the value of UK real estate without complying with beneficial ownership reporting regime). We expect a detailed debate surrounding the provisions with secured lenders and their advisors constituencies. Any uncertainty could be unnecessarily disruptive to the UK real estate finance community.
New lending secured against UK real estate of an overseas entity not in compliance with the proposals (if enacted) would not be possible as the note on the register (of title to the UK real estate) will prevent this. This will, in turn, increase the need for lenders to confirm (as part of the usual "know your customer" processes) that the overseas borrower has registered or is in the process of registering under the beneficial ownership regime in time before the loan may be advanced. The additional checks could increase the time and cost to complete a transaction. It remains to be seen whether these measures could have an adverse impact on loan pricing and terms.
In making these proposals, the UK government recognises the need to find an appropriate balance between the increasing desire for public transparency of ownership of real property and the benefits of a stable and liquid real estate market in the UK.

[1] See "LMA responds to BEIS call for evidence on a register of beneficial owners of overseas companies that own UK property", 15 May 2017, available at http://www.lma.eu.com/legal-regulatory/submission-regulators (LMA member access only).

Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Real Estate practice group, or the authors in the firm’s London office:

Alan Samson (+44 (0)20 7071 4222, asamson@gibsondunn.com)

Wayne P.J. McArdle (+44 (0)20 7071 4237, wmcardle@gibsondunn.com)

Cameron J. Barlow (+44 (0)20 7071 4278, cbarlow@gibsondunn.com)

Claibourne S. Harrison (+44 (0)20 7071 4220, charrison@gibsondunn.com)

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