Joint Committee Report on the Draft Registration of Overseas Entities Bill – A Lender Perspective

The draft Registration of Overseas Entities Bill has been reviewed by a Joint Committee of the House of Lords and House of Commons and we consider the report from a lender perspective.

On 20 May 2019, a Joint Committee of the House of Lords and House of Commons issued a report on the draft Registration of Overseas Entities Bill which was first published by the Government on 23 July 2018 (and was reviewed in the article dated 07 August 2018).

The Committee gave the draft bill a positive reception. It stated that it supported the Government’s ambition to improve the transparency of overseas beneficial ownership in the United Kingdom property market and believed that the draft legislation was timely, worthwhile and, in large part, well drafted.

The Committee made a number of observations, including:

  • Recommending the need for a clear and authoritative definition of “overseas entity”. The definition in clause 2 of the draft bill is “a legal entity that is governed by the law of a country or territory outside the United Kingdom”. The Committee recommended that it should be made clear that the definition does not include individuals.
  • Recommending a “pre-clearance mechanism” and a dispute resolution procedure to determine whether legal entities are registrable. The Committee also recommended a fast-track registration service in cases where special purpose vehicles and property holding companies are incorporated “only a few days before a transaction” and urged the Government to provide Companies House with sufficient resources to meet this challenge.
  • Noting the concern that trusts might be used to circumvent the obligation to register contained in the bill. The Committee described the possible loophole as “worrying” and called on the Government to set out in detail in its response to the report how it intends to counteract this possibility.
  • Noting that a “beneficial owner” in the bill includes a beneficial owner which holds more than 25% of the shares or voting rights in an overseas entity owning UK land and suggesting that the threshold might be lowered.
  • Recommending that, in addition to the annual update requirement, the bill should include a specific requirement on the overseas entity to update the Register before any disposition is made.
  • Recommending the introduction of “workable verification mechanisms". The Committee encouraged reforming the role of Companies House to enable it to conduct checks on the veracity of the information held by it and for it to be provided with sufficient resources to do so. It also recommended that the Government should explore the viability of requiring regulated professionals to verify beneficial ownership information submitted to the Register, and
  • Noting that the Government had recognised that there could be injustice to innocent third parties which may be unable to register a transaction if the overseas entity selling the property was not compliant with the draft bill’s registration requirements at the time of sale. Further, the Joint Committee on Human Rights recommended the inclusion of an appeal provision in the draft bill, while the Committee welcomed the consideration that was being given by the Government to the inclusion of a possible power to disapply the effects of restrictions on registration.

In 2018, the Government took welcome steps to clarify a number of areas of uncertainty for lenders. For example, the concept of an “accredited or legitimate lender” which, alone, could exercise enforcement remedies was removed from the draft bill. This was despite the suggestion in earlier consultation papers that such a requirement might be introduced to prevent beneficial owners taking a charge over land, and enforcing its mortgagee’s remedies, to circumvent the registration requirements.

But issues for lenders remain. For example, the proposal for the Register to be updated before a disposition is made needs to be viewed in a transactional context to consider how it might work and the provisions which may need to be included in the finance documents to accommodate it. There also remains the possibility of a lender being asked to finance an acquisition which has become “land locked” because the vendor is a non-compliant overseas entity. There is still no clear exception in the draft bill for a sale of land by an administrator.

The Committee urged the Government to publish a “mock-up” of the proposed layout of the Register as soon as possible in order that potential users can be fully prepared for the implementation of the bill. It is hoped that this can be produced to ensure that the new regime is accessible and so far as possible intelligible, clear and predictable (the eighth of Lord Bingham’s principles of the rule of law).

The Government has stated that it is considering the recommendations made by the Committee and will publish a response in due course.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.