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.

Update

On 18 July 2019, the Department for Business, Energy and Industrial Strategy published its response to the recommendations made by the Joint Committee of the House of Lords and House of Commons (referred to above).

The Government accepted some of the recommendations but rejected others. For example, it recognised the need for clarity on how the Register would look and operate but made no mention of a “mock-up” being published to facilitate this, as the Committee had suggested.

The draft bill presents a number of concerns to lenders. Perhaps the most serious is the possibility that a third party could enter into a valid transaction but be prohibited from being registered as the proprietor of the land which is the subject of the transaction. This creates the risk that land may become “locked-out” of ever being able to be registered, to use the expression used by the Government in its overview document published on 23 July 2018 (at para. 32).

The scenario would arise if a third party bought land from a seller that was an overseas entity but which was not registered as such at Companies House as at the date of disposition. This would affect both the seller and buyer because the transfer would not be registered by the Land Registry. It would also affect any lender which had advanced, or agreed to advance money, to either of them.

As a result, it is important that lenders should be able to satisfy themselves that borrowers which are overseas entities are not only registered as such at Companies House but are, also, compliant with any filing obligations as at the date of disposition. In the draft bill published in July 2018, the filing obligation required the filing of an annual update.

The Committee heard evidence which suggested that overseas entities should also be subject to additional “event-driven” filings. While, the Committee did not support such a suggestion, it did suggest that overseas entities should be under an obligation to update the register immediately before a disposition. In its response, the Government stated that:

The Government welcomes the Committee’s acceptance of the reasons why an “event-driven” update requirement for overseas entities could adversely affect third parties transacting with them.

We agree that it is important that the Register is as accurate as possible at the point at which dispositions take place, and will consider further how best to achieve this aim. It is important to determine firstly how this could work in practice, considering the likely uncertainty and impact on third parties and overseas entities; potential sanctions; and how other recommendations in this report and wider Government proposals interact to ensure accurate and timely information on the Register.

The Government understands the Committee’s concern that third parties should be able to fully satisfy themselves that the overseas entity is compliant. The Government’s intention is to implement a robust public register which will give third parties sufficient information to be assured of the overseas entity’s compliance.

This response is reassuring for lenders but they will need to keep a watching brief on the possible evolution of any additional filing requirements. Again, this appears to be something which the Government appears to recognise because, in its response, it stated that:

The duty is on the Registrar of Companies House to maintain the Register; and for overseas entities to provide specified information. The Register will then be publicly available for applicants seeking to register land to check. Both the land registries and applicants seeking to register are entitled to rely on information contained in this register as correct. As such, the Government believes third parties are adequately protected, but will continue to keep this under review as the draft Bill is finalised.

An issue which remains outstanding is the absence of an appeal procedure in the draft bill by which a disposition by a non-compliant overseas entity may nevertheless be registered in order to prevent land from being “locked-out”.

The possibility that an appeal procedure might be introduced into the draft bill was referred to in the overview document which the Government published on 23 July 2018. It was also referred to in the letter 24 April 2019 which the Joint Committee on Human Rights sent to the Committee and which stated that:

In order to protect innocent third parties, the system of registers should ensure that it is very easy to determine whether a seller is an overseas entity and whether they are adequately registered at the time of sale. Moreover, in order to make the interference with property rights justified and proportionate, it would also be better to ensure that there is a method to resolve legal ownership of property where an innocent third party has bought real estate from an overseas entity that was not properly registered.

The Government has not referred to an appeal procedure in its response to the Committee.

In conclusion, the draft Registration of Overseas Entities Bill remains an important piece of proposed legislation for the real estate finance industry and one which will require ongoing review as it proceeds on its legislative progress. The Government has stated that it aims to deliver an operational Register in 2021.

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.