The Department for Business, Energy & Industrial Strategy (BEIS) recently issued a ‘call for evidence’, setting out the objectives and scope of a proposed new register. The register would show who owns and controls overseas companies that own (or wish to acquire) UK property or that may seek to engage in UK government procurement. BEIS has asked overseas investors and experts for their opinions on how this register should be delivered.
Take a look at our recent Talking Business blog which outlines how the new register will work.
In brief, following the introduction of the register, overseas entities that own or wish to acquire UK property, or bid on government procurement contracts (valued at over £10 million), would have to supply beneficial ownership information to Companies House and apply for a registration number. Overseas entities that already own UK property will have 12 months to comply with the new rules and obtain a registration number.
The LMA (Loan Market Association) issued its response to the call for evidence, understandably focusing on the potential impact for lenders and the property market.
The LMA has highlighted the importance of a staged approach to implementation of the new register. The proposed changes are significant and are likely to lead to widespread disruption and uncertainty. Therefore, ensuring that all relevant entities are made fully aware and understand their obligations during a transaction will help to prevent an overall slowing down of the property market.
There is a need for consistency between the new register and the existing PSC (people with significant control) register. The two registers have broadly similar aims. It is proposed that the definition of beneficial ownership will be the same in both registers; the LMA has therefore suggested combining the new register with the PSC register. This would make the process easier and more efficient, and would also reduce the burden on companies who may be required to complete two different registers.
Share security issues still not addressed
As it is proposed that the definition of beneficial owner aligns with that used for the PSC regime, the LMA has again flagged some concerns about the PSC regime.
There is uncertainty around how jointly held rights and shares, and joint arrangements will be dealt with under the new register. Under the PSC regime there is an exemption in relation to rights attached to shares held as security. However, it does not provide any exemption for shares held as security by a security agent.
Should a security agent take a mortgage it will become the registered holder of the shares. If the agent takes over 25% of the borrower’s shares it will be classed as a PSC.
As a result of the new register, the definition of PSC could be widened to include share security taken over foreign companies. This could potentially lead to a larger number of security agents being caught by the regime and becoming subject to additional disclosure requirements.
The LMA is keen to avoid legitimate lenders becoming registrable persons as a result of them taking security over shares in an overseas company that owns UK property. If a lender was required to do this, and disclose its interest in place of the actual owner of the property, this would go completely against the whole aim of the register – transparency of ownership.
One of the proposed consequences of non-compliance with the new register is that the relevant overseas company will be unable to deal with UK property. The LMA flags that it is important that existing arrangements in place prior to the introduction of the register are not adversely affected. For example, if a lender has an existing charge against a property owned by an overseas entity and needs to re-take the charge (perhaps to correct an error), any restriction imposed in the meantime could prevent the lender from dealing with its interest in the property.
Lenders have various routes that allow them to realise their security. The LMA recommends a more substantial review of how these may be affected by the new register. A lender should be able to take whichever route it deems most necessary, without any increased cost or delay.
Compliance with the register
There needs to be a degree of protection for genuine third party lenders but it is important that this does not place an unnecessary burden on them. It would be excessive were they required to repeatedly prove that they are not merely posing as a lender in an attempt to avoid the registration requirements.
Should an overseas entity fail to comply with the requirements of the new register, any prevention of transfer commences once the sale is completed. This could leave a seller holding onto the property on behalf of the overseas entity.
Lenders will need to verify that the borrower carried out effective due diligence and obtained a registration number (which will become a requirement under the new register). Otherwise, a loan could be used to purchase property but the new owner may not be able to register title at the Land Registry until it complies with the beneficial ownership requirements.
This situation could lead to the borrower being in breach of the terms of the loan agreement and issues with registration of security.
Real estate finance in the UK is vital to economic growth. The LMA wants detailed analysis of the impact of the register on the provision of finance and the supply of investment. Legitimate third party lending and security agreements should be given preferential treatment under the new register requirements, and additional compliance requirements for the new register should not create any unnecessary burden on those entities required to comply.
The full LMA response is available on the LMA website, accessible to members. The consultation is now closed and the response from BEIS is expected later this year.
This blog post was written by Elliot Gibson, for further information, please contact:
Elliot Gibson, PSL assistant, Banking & Finance
T: 0161 836 7707