Draft Registration of Overseas Entities Bill

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1 17 September 2018 To: Introduction 1. The British Property Federation (BPF) represents the commercial real estate sector. We promote the interests of those with a stake in the UK built environment, and our membership comprises a broad range of owners, managers and developers of real estate as well as those who support them. Their investments help drive the UK's economic success; provide essential infrastructure and create great places where people can live, work and relax. 2. Our members support the Government s drive to tackle corruption and money laundering through introducing greater transparency in overseas property ownership. It is also appropriate to level the playing field between UK companies which are already subject to transparency disclosure requirements through the PSC register; and their overseas counterparts through the new beneficial ownership register. We therefore welcome the approach taken in the draft legislation to mirror the PSC requirements. 3. Overseas investors are a crucial part of the UK real estate sector, owning around 140 billion of commercial property 1. These investments are often long-term and critical to economic growth and urban regeneration. The UK must remain a destination of choice within the global investment market, and the impact of the register should be seen in the context of the wider climate for non-residents, with the draft Finance Bill already taking forward significant changes for non-residents on the taxation of gains and property income. Significant efforts are therefore needed to ensure a smooth transition to the new register so that investors are aware of their obligations and there is no undue disruption to the transaction process. 4. Our primary concerns and recommendations are set out below, while Appendix 1 provides feedback on the clauses of the draft legislation where we have specific comments. Key concerns and recommendations 5. To ensure legitimate overseas investors can continue to invest in the UK, the register needs to operate in a manner that is clear and proportionate. The feedback from members is that the register s requirements will be factored into future property transactions and hence, in theory, should not inhibit the process. The current Know your client (KYC) requirement means that those managing transactions will normally have information on the beneficial owners of the entities they are dealing with and it is now a relatively standard part of the transactional process. While BEIS research (BEIS Research Paper Number 13) on the impact of the register found 50% of stakeholders sampled believing the new register would not make the UK a less attractive place for investment, 41% thought it would have a negative impact and this emphasises the need for the register to be implemented in a manner that is practical, pragmatic and does not add unnecessary burdens. 6. There are aspects of the draft legislation which require clarification, and these are set in Appendix 1. However, a large part of making the register effective will be operational and, on this point, we would like to highlight a few key aspects: 1 PIA Property Data Report 2017

2 Education and awareness of new register and its requirements: The Government s consultation response published in March indicated the intention for the register to be operational in The Government will need to optimise the time available to communicate the new requirements to overseas investors. More challenging will be existing overseas owners who may have invested in the property a long time ago and for whom traceable contact details may not always be immediately available. There is a service address linked to a property within Land Registry, although this will not necessarily provide sufficient information to know the beneficial owner. The position is further exacerbated in Scotland, where the Land Register of Scotland does not include a specific service address at all. It is noted that the BEIS Research Paper Number 13 on the impact of the register highlighted the difficulties the research team had in contacting overseas owners for interview the report said, interviewing decision makers of overseas entities owning UK property also proved to be unviable due to difficulties in acquiring contact details for the owning proprietors listed on HM Land Registry s overseas companies dataset. Giving these investors a further 18 months to register after the register comes into operation is therefore welcome but does not in itself solve the difficulty of locating the required individuals; an alternative would be that existing overseas entities owning UK property would only have to register beneficial ownership when they wanted to make a disposition concerning one of their properties. In some cases, this may be the first instance that they become aware of the register s requirements. Application of criminal sanctions: The draft legislation sets a framework of criminal sanctions through fines or imprisonment for failing to comply with the register s requirements. Whilst it is accepted that the threat of sanction will drive behavior and help ensure compliance, we would ask a pragmatic approach is taken particularly for existing owners. Under Schedule 3, Part 2 of the draft Bill the officers of an existing property-owning entity could face 12 months imprisonment for not providing beneficial ownership information within 18 months of the register taking effect; however, as set out above, it is highly likely that existing owners will fail to comply through genuine ignorance as opposed to any malicious intent. Clear and effective guidance: Guidance must be made available that clearly sets out the process overseas entities will need to go through to comply with the register s requirements. Our members have noted that the PSC guidance was helpful in this regard and given the similarities between the two registers the PSC guidance could provide a useful template. Property will often be owned though collective investment structures with different tiers of ownership through fund vehicles, holding companies and property-owning companies (who may be different types of legal entity) and guidance will need to provide illustrative examples of when beneficial ownership information would need to be registered for these structures and other instances where there are chains of ownership. Our members would be happy to support officials in working through these types of examples. Companies House being effectively resourced: It will be particularly important for the Land Registry and Companies House to be sufficiently resourced to deal with registration requests and enquiries in the short term, while awareness of the new requirements amongst investors will be lower. Furthermore, it is not uncommon for property holding companies or SPVs (special purpose vehicles) to be incorporated only days in advance of a transaction, therefore, the registration will ideally need to be online and fully automated to allow for real time registration. If real time registration is not viable, Companies House will need the capacity to offer a fast-track registration service (we would suggest 24 hours), to ensure that the transactions are not delayed unduly by these rules.

3 7. We recognise that BEIS has taken the time to consider the impacts which could arise in relation to the systems of Scottish land law, conveyancing practice and land registration, all of which are somewhat different from those in England and Wales. We would urge BEIS to continue to engage fully with the Scottish Government and the Registers of Scotland to ensure that the implementation of the UK Government s proposals is undertaken in a manner which properly dovetails with the Scottish system and also the forthcoming Scottish Register of Persons Holding a Controlling Interest in Land Regulations. We are particularly concerned to ensure that the separate UK and Scottish registration requirements do not end up imposing any form of double reporting requirements in that regard, through our Scottish arm, the Scottish Property Federation, we have recently fed back to the Scottish Parliament that the proposed Scottish regulations should be amended to exclude overseas entities from their scope, on the basis that these will be covered by the current UK Government proposals. 8. We look forward to discussing our comments with you in more detail. Please do not hesitate to get in touch if you require further information: Simon Nathan, Senior Policy Officer (Finance) British Property Federation, St Albans House, Haymarket, London SW1Y 4QX ; snathan@bpf.org.uk Appendix 1: Comments on relevant legislative clauses Clause 2 - Definition of overseas entities 9. We agree with the approach taken in Clause 2 (2) to define a legal entity with reference to the law of the country by which it is governed. In practice, this will mean having to check the legal status or take legal advice on whether the overseas entity is considered a legal person. 10. As such, there is no blanket rule across jurisdictions on the legal status of particular entities. Partnerships registered in England and Scotland are not covered by the register but as an illustration, SLPs have legal personality and ELPs do not. Will the Land Registry have the appropriate knowledge on whether a particular overseas entity is or is not a legal entity so that it can decide whether it should accept or refuse registration in the absence of an overseas entity ID? Or will the burden of proof fall on the overseas entity (or its advisors) to provide evidence on legal status in the relevant jurisdiction? Comprehensive guidance in relation to specific types of overseas entities may be helpful. Clauses Process for applying for registration, obtaining information on beneficial owners and updating 11. Members felt the process set out in the draft legislation for registration, obtaining information on beneficial owners, and annual updates is fair and reasonable and hence we do not have any detailed comments. The BPF s submission to the original policy consultation in May 2017 had favoured annual updates instead of the two years originally proposed to ensure consistency with the PSC register and hence we welcome the timeline for updating in the draft Bill. Clauses Supplementary provision about offences 12. As previously highlighted, the proposed framework of criminal sanctions should drive compliance, although a pragmatic approach should be taken to prosecutions against existing owners who may have been unaware of the register s requirements.

4 13. In addition, we would welcome clarification on the impact on transactions if an offence was committed under the legislation. Paragraph 5 (3) of the new Schedule 4A makes clear that a disposition would not be invalidated if an overseas entity had failed to comply with the register s requirements, but an offence would still have been committed. While it is welcome that assets would not in effect be frozen, what would happen to the financial proceeds of that transaction - would they be considered proceeds of crime? Schedule 1 - Applications: Required information 14. The information required to be submitted as part of the application for registration is appropriate, and in line with the PSC requirements. 15. It would be helpful if guidance could further define what is meant by managing officers within Schedule 1, Part 4 where an officer could be an individual or a legal entity. Overseas entities will be required to provide information on each managing officer of the entity (Table in Clause 4) although the explanatory notes simply state that a managing officer includes a director, manager or secretary. Schedule 2 Registrable beneficial owners 16. As highlighted in paragraph 6 of our response, property will often be held through collective investment structures which could be multi-level structures consisting of fund vehicles, holding companies and property-owning companies (who may be different types of legal entity). In practice, the challenge for overseas entities will be in interpreting Paragraphs 2-4 of Part 1 to determine which individuals or legal entities are registrable beneficial owners. As it stands the draft legislation and explanatory notes do not in themselves provide sufficient clarity for overseas entities to determine who their registrable beneficial owners are and how the rules should be applied, particularly if their ownership structures are complex. 17. Again, there will be a need for clear guidance which applies the conditions in Paragraphs 2-4 to the different ownership structures commonly found in the property sector and identifies who the registrable beneficial owners would be. Appendix 2 sets out examples of common real estate investment structures and our members would be happy to work with officials to determine how the rules should be applied. 18. It is noted that the meaning of a beneficial owner in Part 2, Paragraph 6 of the legislation broadly mirrors the conditions set out for the PSC register and as such we do not have any comments on the wording of the legislation. The exemption from registration set out in Part 4, Paragraphs 8-9 was not contained in the PSC legislation and overseas entities would need further clarity on how this should be interpreted. 19. In terms of guidance, Chapter 5 (alongside Chapter 2) of the Guidance on the register of people with significant control published by BEIS sets out further information on how these conditions should be applied and provides a useful starting point. However, this guidance needs to be built upon for the beneficial ownership register with further illustrated examples of applying the measures to different ownership structures. Schedule 3 - Land ownership and transactions: England and Wales Part 1 Meaning of qualifying estate

5 20. While we understand the rationale for defining a qualifying estate as leases over seven years in England and Wales to align with registrable duration (with longer periods for Scotland and Northern Ireland accordingly), the approach does cause inconsistency throughout the UK. The approach set out in the original consultation for setting lease duration at 21 years across the UK would have been simpler for investors. Restrictions on disposals 21. Paragraph 3 (2) sets out a number of principles whereby the restrictions on disposals would not apply. Those set out in Paragraphs 3 (2) (b) and 3 (2) (c) will be particularly relevant as they seek to cover for example, contractual obligations entered into before restrictions were put in place on the register. Property transactions can be complex, and it will be helpful if accompanying guidance set out practical scenarios to which the paragraph may apply. Our members would be happy to work with officials on this point. Making dispositions that cannot be registered 22. Our members welcome the provision in the new Schedule 4A, Paragraph 5 (3) that dispositions would not be invalidated if an overseas entity had failed to comply with the register s requirements. This will ensure a chain of conveyances would not be disrupted due to one entity not complying with the register s requirements. Part 2 Duty of proprietor to register as an overseas entity within transitional period 23. Providing existing overseas entities with an additional 18 months to register is welcome although, as highlighted in paragraph 6 of our response, the challenge will be finding an effective way of making existing owners aware of the changes. An alternative would be that existing overseas entities owning UK property would only have to register beneficial ownership when they wanted to make a disposition concerning one of their properties. Schedule 4 Land ownership and transactions: Scotland 24. We note that schedule 4 of the draft Bill proposes that the Keeper must reject an application for rectification of a document under s.8 of the Land Reform (Miscellaneous Provisions) (Scotland) Act 1985 if the applicant is an overseas entity, which is not a registered overseas entity or an exempt overseas entity. We request that you consider further the extent to which this is appropriate in all circumstances, and also whether (at the very least) this should only apply to rectifications, which follow on from registrations originally made on or after 8 December 2014 (i.e. in line with other transitional provisions).

6 Appendix 2: Typical real estate investment structures This appendix sets out two examples to illustrate some of the more typical real estate investment structures and sets out some of the reasons the different types of structures are used. The appendix includes: 1. A widely held investment structure 2. A closely held/joint venture investment structure Example 1: A widely held investment structure Investors (Diverse range of investors from multiple jurisdictions) Investors Investors invest via a fund to pool resources and achieve economies of scale, to spread risk and to access professional investment and portfolio management services. Master Feeder Fund Master Feeder Fund This vehicle is usually a transparent entity. Investors like to invest in a transparent vehicle to ensure that they are taxed according to their individual tax attributes. Holding Company A holding company is required in order to consolidate all of the underlying real estate investments. The administration and financing of the property portfolio may also be carried out by the holding company. Local holdco SPV Holding Company SPV SPV SPV B C D Individual investors may not have the expertise or scale to carry out the administration in respect of their individual investment, so it makes more sense to carry this function out centrally. It is not uncommon for a local holding company to be used in the same jurisdiction as the investment, as illustrated with the investment in A. SPVs and investments Individual real estate assets are often directly owned by a special purpose vehicle or holding company. This allows flexibility when selling the asset e.g. the ability to sell a proportion of the asset rather than the whole asset. It also allows for specific borrowing at the level of the asset if required. A

7 Example 2: A closely held/joint venture style investment structure The investors: In this case, where there are fewer investors pooling large amounts of capital, the investors could be exempt or non-exempt institutions or some other large scale professional investor. The Fund Vehicle: This would typically be a JPUT or a Lux FCP, or a partnership to allow transparency given the professional nature of the investors, it is not necessary for the fund to be a regulated vehicle offering protections in the same way that a fund being offered to retail investors would be needed. hold Co: If the fund invests in lots of jurisdictions, quite often they will have a separate Hold Co. in each jurisdiction where they have investments. Prop. Cos: It is common for each individual asset to have a separate property company to avoid cross collateralisation of risk with other assets. Where there is more than one lender, there will also typically be a separate SPV/Prop Co for each lender.