Be aware of the updating requirements for overseas entities at Companies House

Summary

The 1st of August 2023 marks the one-year anniversary of the launch of the Register of Overseas Entities (the OE Register) at Companies House and the start of the first annual update process for overseas entities on the register.

The Government is also proposing to make further refinements to the regime by way of the Economic Crime and Corporate Transparency Bill, which is in the final stages of the legislative process and is expected to get Royal Assent before the end of the year.

This briefing is a reminder of how the regime affects land transactions in the UK and outlines the requirements for the annual update process and highlights a number of the proposed amendments to the regime.

Overseas entities on the OE Register will need to be ready to file their annual update statements shortly after the anniversary of their registrations, and should be aware that, depending on when (and the extent to which) the proposed amendments to the regime come into force, annual update statements due later in the year may be affected by increased disclosure requirements brought in by the amendments.

The Register of Overseas Entities and land registration

The OE Register is a register at Companies House that was established under the Economic Crime (Transparency and Enforcement) Act 2022 as part of the Government’s strategy to combat global economic crime.

The OE Register is for overseas entities that own certain property registered at the Land Registry or Land Register of Scotland. It contains information about the entity and its beneficial owners. The regime impacts on real estate transactions and their registration. The regime also applies to certain property in Northern Ireland, but the position there is not considered in this briefing.

For England and Wales, the property affected are freeholds and leases for more than 7 years that are or will be registered at the Land Registry in the name of an overseas entity. The regime does not affect properties where the overseas entity became the registered owner before 1 January 1999. For Scotland, the property affected are leases for more than 20 years and heritable interests that were registered in the Land Register of Scotland on or after 8 December 2014.

The transactions affected are, for England and Wales, the transfer of a freehold or a lease for more than 7 years; a legal charge; and a grant of a lease for more than 7 years. For Scotland, transactions affected are a disposition (transfer of heritable interest); a grant of a long lease (over 20 years); the assignation of a long lease; the grant of a standard security; an application for voluntary registration; and a notice of title.

For an overseas entity purchaser or tenant, for England and Wales, an application to register an affected transaction made to the Land Registry from 5 September 2022 will be cancelled (and for Scotland, an application to register an affected deed will be rejected) if the overseas entity is not already registered on the OE Register (note that being registered requires that such registration has been updated as required by the legislation – see ‘The annual update statement’ below).

In England and Wales, the Land Registry has (in most cases) entered a restriction on an existing title to an overseas entity’s registered property that prohibits any registration of any transfer, legal charge or lease for more than 7 years unless an exception applies, in particular, that the entity was registered on the OE Register (and being registered requires that such registration has been updated as required by the legislation) at the time of such transaction. If an overseas entity, that is entitled to be registered at the Land Registry but is not so registered, transfers, grants a legal charge or lease for more than 7 years, there is an equivalent prohibition on registration at the Land Registry with exceptions. If an overseas entity makes such a disposition (i.e. the transfer, charge or lease) where registration of that disposition is prohibited (because the overseas entity is not duly registered on the OE Register at the time of the disposition), while the disposition itself remains valid, an offence is committed with a potential criminal penalty.

More detail is available on the regime here - Important deadline imminent for Economic Crime Act (cms-lawnow.com)

The annual update statement

Every overseas entity on the OE Register must file an update statement at Companies House at least every 12 months and has up to 14 days after the end of the 12-month period to do that. The first annual update statements will start being due from 1 August, the anniversary of the first overseas entities to be registered.

Companies House have announced that their service for receiving update statements will be open in August. Their guidance for how to file an update is available here. Points to note include:

• An update statement must be filed even if none of the information on the OE Register has changed.
• Any changes and new information must be verified by a UK regulated agent no more than three months before the date of the update statement.
• If the registrable beneficial owner (RBO) of the overseas entity has changed, verified information about the new RBO must be provided in the update. The update must also include verified information about anyone who both became and ceased to be a RBO during the update period – which, for this year’s update, will be the period since the overseas entity was first registered.
• If there are any trusts involved in the registration, even if no amendments need to be made to the trust information, the Companies House on-line service for updating cannot be used and Companies House should be contacted for further guidance. There are similar restrictions for overseas entities that have RBOs or managing officers with personal information protected at Companies House (or who have applied for this protection). See the Companies House guidance for more on this.

An overseas entity that has ceased to be the registered owner of any qualifying estate is entitled under the legislation to be removed from the OE Register but no process is yet available from Companies House for this. In the meantime, so long as an overseas entity remains on the OE Register, it should submit its update statement by the due date.

Consequences of failing to file an update statement

Failing to file an update statement on time is a criminal offence by the overseas entity and its officers, which Companies House may refer for prosecution. Companies House can also impose a civil financial penalty. Guidance on the approach Companies House will take to enforcement is available here.

As mentioned earlier, an overseas entity in default will not qualify as registered, preventing it from registering its transaction at the Land Registry or Land Register of Scotland and making it unable to satisfy the restriction on registration at the Land Registry (unless another exception applies).

Proposed amendments to the regime

There are a number of amendments proposed to be made to the regime by the Economic Crime and Corporate Transparency Bill, the second part of the Government’s package of legislative reforms to tackle economic crime. The Bill is in the final stages of the legislative process and is back on the House of Commons agenda for the start of September. Royal Assent is expected before the end of the year. The proposed amendments will, among other things, increase the disclosure requirements of overseas entities and, depending on when (and the extent to which) the amendments come into force, could affect annual update statements due later in the year. The proposed amendments to the regime include:

• Additional information requirements for overseas entities, including a requirement to supply Companies House with title numbers, principal office addresses (rather than registered office addresses) and additional information about trusts. The Bill also proposes that overseas entities be required to disclose changes in beneficial ownership that occurred in the period between 28 February 2022 and 31 January 2023.
• Changes in the scope of what constitutes an RBO:
  • Legal entity trustees that meet the beneficial ownership conditions will be registrable. Under the current regime, they will only be registrable in limited circumstances. The Government explains this amendment in their fact sheet on beneficial ownership.
  • Where an overseas entity holds the qualifying estate as nominee for another person, that other person (or if that other person is a legal entity, the beneficial owner of it) will qualify as a beneficial owner of the overseas entity. Under the current regime, only the actual beneficial ownership chain of the overseas entity is required to be analysed, even when the overseas entity is a nominee for someone else.
• Additional update requirements, including a requirement for the overseas entity to update Companies House as soon as reasonably practicable (and in any event within 14 days) after any change to the information that was provided for the OE Register. The Bill also proposes a requirement to file an update or a no change statement with Companies House no more than 14 days prior to any acquisition or disposal by the overseas entity of a qualifying estate.
• That an overseas entity does not qualify as registered (preventing registration of its transaction at the Land Registry or Land Register of Scotland and making it unable to satisfy the restriction on registration at the Land Registry (unless another exception applies)), if the overseas entity has an outstanding ‘section 1092A notice’ from Companies House. A ‘section 1092A notice’ is an information request that Companies House would be able to send to an overseas entity to check compliance with obligations.

Practical points for overseas entities, their lenders and other counterparties

• Overseas entities: Overseas entities should be reviewing their current registrations for changes and gathering any new information required for the update statement, while remaining alert for the implementation of the proposed amendments. Any section 12 notices required will need to be sent out in good time. It would be prudent to make early contact with a UK regulated verifier.
• Existing finance transactions: In respect of existing finance transactions where a lender holds security granted by an overseas entity over affected property, a failure by that overseas entity to comply with its updating obligations will likely constitute a breach of any representations and undertakings relating to compliance with laws or ongoing registration requirements. There will also be implications on the ability of that overseas entity to deal with leases in respect of the affected property (which could impact its ongoing ability to service the loan). There may be complications for the lender in an enforcement scenario (as further detailed in our previous briefing here) and lenders are likely to seek to ensure that the overseas entity remedies their failure in such circumstances (including by reference to any ongoing compliance and further assurance obligations in the underlying finance documents). Lenders are likely to require the overseas entity to remedy its breach as a condition precedent to matters requiring lender consent, including any partial release of affected property from the security package (as this ordinarily involves the disposition of the released property by the company with disposal proceeds being applied towards prepayment of the loan, a process which could be impacted by the regime). The Land Registry has confirmed in its Practice Guide 19 that “a discharge of a registered charge is not a disposition and cannot be prevented by a restriction”, meaning that, once the loan has been repaid, it should be possible to record the discharge of the registered charge regardless of the overseas entity’s compliance with its updating obligations.
• New security: Before entering into any new security with an overseas entity in respect of affected property (including pursuant to the accession of a new obligor in an existing finance transaction), lenders will want to ensure that the overseas entity is not in breach of its updating obligations. In the event such breach is revealed as part of the due diligence process or otherwise, lenders are likely to require the overseas entity to remedy its breach as a condition precedent to funding. Please refer to our previous briefings for further detail (including The Economic Crime (Transparency and Enforcement) Act – consequences for enforcement (cms-lawnow.com), The Economic Crime (Transparency and Enforcement) Act – what this will mean for real estate lenders (cms-lawnow.com), Staggered implementation of the Economic Crime (Transparency and Enforcement) Act – an update for real estate lenders (cms-lawnow.com) and The Economic Crime (Transparency and Enforcement) Act – what this will mean for real estate lenders in Scotland (cms-lawnow.com)).
• Buyers of an overseas entity and related funding arrangements: Buyers of an overseas entity on the OE Register, or of a group containing one, should be mindful of the due date for the update statement and seek appropriate contractual protections and access to information rights. Where a lender is funding such acquisition (or a new affected lease where the landlord is an overseas entity), it is likely to require, as a condition precedent to funding, evidence that the overseas entity is not in breach of its updating obligations.