In 2018, the government produced draft legislation proposing the introduction of a public register of the beneficial ownership of overseas entities that own property/land in the UK, the Overseas Entities Bill (the Bill). The register would be similar in nature to the PSC register for ownership of UK companies.
Background: What is the purpose of the register?
As more fully detailed in our guide produced in 2018, the Bill proposed to provide transparency by identifying and recording the overseas entities that own UK real estate in a publicly accessible register (the Register). The purpose of the Register would be to fill the current gap of information on overseas owners and prevent overseas entities investing in the UK property market in a bid to hide financial crime and launder criminal proceeds. The legislation proposed to achieve this aim by enforcing restrictions on overseas entities’ ability to acquire and dispose of freehold property and leasehold interests, further enforced by the introduction of heavy penalties for the overseas entities that fail to register and update their entry annually. If the legislation is introduced, overseas entities that already own land in the UK will be given 18 months to comply with the new requirements.
Assuming the Bill becomes law, the key considerations for lenders and borrowers are:
- Delays to acquisitions: The restrictions would mean overseas entities could not become registered proprietors of any UK property until they have complied with the regime, which may impact and cause delays to acquisitions.
- Increased compliance: The regime places an onus on the borrower to ensure the entity is correctly registered, requiring increased due diligence to be carried out by the Lender at the outset of a transaction to ensure their security can be registered. This may create an additional burden from a time, cost and administrative standpoint.
- Effects on existing security: Lenders with existing loans made to overseas entities that have been secured by UK property are to be carved out of the regime to prevent issues with historic transactions.
- Additional loan agreement provisions:
- The lender should include evidence of the borrower’s compliance with the regime as a condition precedent to the transaction to, among other things, ensure the lenders’ security over the property can be registered.
- Loan agreements often require borrowers to give certain confirmations in respect of the PSC register and its requirements. Lenders should require borrowers to make similar confirmations in respect of the overseas entity Register.
- As overseas entities are continuously required to update their registration in accordance with the requirements under the Bill, lenders should make non-compliance an event of default under loan agreements with overseas entities.
In July 2019, recommendations were made in a pre-legislative scrutiny report (the Report) to address gaps in the legislation that could undermine its key purpose. We considered those recommendations in detail in a previous article, looking at the loopholes that could arise under the Bill. Since then, the government has released its response to the concerns raised:
- The 25% threshold of "beneficial ownership": under the Bill the threshold at which beneficial owners must be disclosed on the Register sits at 25%. The scrutiny committee argued that the threshold undermines the Bill’s aim to capture the true beneficial owners of overseas entities. Property investors could be encouraged to use more than one corporate vehicle, each owning under 25%, to avoid disclosure on the Register which could undermine the transparency surrounding ownership of UK property. In response, the government confirmed the 25% ownership threshold by reference to the PSC register but stated that proper guidance would be given and terms such as "significant control" will be clear and concise.
- Trusts not being classed as "entities" for the purpose of the Bill: in response, the government noted “whilst trusts do present a method by which illicit funds can flow, the 2017 National Risk Assessment of money laundering and terrorist financing concluded that the risk of criminals exploiting UK trusts is assessed to be low.” However, the government is considering whether the requirements for registration could be tightened further by requiring overseas entities to register with the Registrar of Companies to declare if they are representing a trust.
- Exempt entities: under the draft Bill the government holds the power to exempt certain entities from publishing their information on the Register. The committee recommended that the government publish annual statements on the use of the exemption to support the aim of transparency. In response, government confirmed its intention to use the power to exempt entities from registering only rarely and in the interests of national security and the economic well-being of the UK.
The government’s full response to the recommendations made under the Report can be found here.
Since the government’s response to the report in September 2020, progress with the Bill has stalled. However, it does appear that the Bill remains on the government’s agenda as confirmed in a Written Ministerial Statement in November 2021.
Further, in a recent comment received from a senior policy advisor in the department for Business, Energy & Industrial Strategy, it was said that emergency legislation in response to COVID-19 and the additional challenges placed on the government throughout the pandemic had led to unavoidable delays in the legislation’s passage. They confirmed that “The Register of Overseas Entities Beneficial Ownership (ROEBO) is one of a number of proposed corporate transparency reforms which together will play an important role in underpinning a strong, transparent and attractive business environment in the UK whilst reducing the opportunities for bad actors to abuse our systems and controls.” They also confirmed that “The government remains committed to introducing ROEBO … [and] intends to introduce the legislation when parliamentary time allows.” Lenders and foreign investors should therefore be prepared to comply with the new requirements to declare beneficial ownership in UK property in the near future.