Real property ownership in the UK is founded on the principle of registration. Until it is named as the registered proprietor of a property on the Land Registry official copies, a purchaser will not hold the legal title. In the period between the dating of the property transfer made between the seller and buyer (completion) and the point at which the buyer’s registration is confirmed by the Land Registry (registration), it is the seller that retains the legal estate in the property – this is the so-called “registration gap”. During that gap, the buyer will have the equitable right to occupy the property or to keep any rents received from occupational tenants but the seller, as legal owner, may need to perform certain landlord functions on behalf of the buyer, such as serving notices pursuant to the leases or under the Landlord and Tenant Act 1954. The buyer cannot do these things as it is not yet the legal owner nor, within the meaning of the 1954 Act, the “competent landlord”.
The practice of registered conveyancing is long established and compulsory first registration as we know it has been a requirement since 2003; but the system, by its very nature, relies on the smooth and timely running of the office responsible for registering transactions. What we are currently seeing, however, is that the Land Registry is experiencing an unprecedented number of applications whilst at the same time contending with shortages on staff and resources. Practitioners are also increasingly unlikely to see an application go through to registration without a requisition being raised by the Land Registry for more information, such has been the tightening of rules designed to cut down on fraud. The registration gap is, as a result, longer than it has ever been.
Protection for buyers
So what can buyers of commercial real estate do to protect the management of their asset between completion and registration? On a practical level, we have seen sale and purchase contracts evolve to put greater obligations on sellers during the registration gap to inform buyers of any notices received and to give buyers greater control over dealings with tenants during that time. Buyers will now, as is becoming standard, require that a seller expressly appoints the buyer to act as agent for the seller to serve notices and take any other action to perform obligations under the leases or in connection with the management of the property. In addition, buyers will often require sellers to provide reasonable assistance in relation to requisitions raised by the Land Registry.
Even so, buyers and their conveyancers would be well-advised to anticipate hurdles to registration prior to exchanging contracts, in order to nip any requisitions in the bud. This could include making sure the seller has provided certified copies of any powers of attorney used for signing the property transfer or, in the case of overseas purchasers, providing valid methods of execution and the necessary statement (in Form 7) as prescribed by the Land Registry. This statement is a condensed version of the statements usually given in letters of legal opinion from the jurisdiction where the purchasing entity is established. Essentially, the Land Registry will want to be satisfied that the purchasing entity is validly incorporated in that jurisdiction and “has no limitations on its power to hold, mortgage, lease and otherwise deal with, or to lend on a mortgage or charge of, land in England and Wales”. Without satisfying itself in that regard, the Land Registry will not register that purchaser as the legal owner.
Greater transparency (and scrutiny) for overseas entities
Further hurdles still are to be set for overseas entities wishing to invest in UK property. As a result of the Fifth Money Laundering Directive, many practitioners will already have observed the increasing trend for counterparties to request anti-money laundering (AML) information on transactions. For example, an institutional seller will not sell its property asset until it has completed due diligence on the buyer’s persons with significant control (PSC) and its source of funds. This bears mentioning as it seems to be a precursor to what will be required when law is passed to regulate transactions where overseas entities are to be registered as legal proprietors; that is to say, registration in these cases will not be possible without registering all persons with significant control.
The Registration of Overseas Entities Bill (OEB) was first tabled as a draft bill in 2018 – since then, it has been mothballed somewhat but has not gone away. As recent press coverage has shown, it is no secret that the UK is a popular jurisdiction for owning real estate. It is estimated that nearly 100,000 properties in the UK are held by overseas entities. Regardless of whether or not there are further leaks from offshore jurisdictions concerning UK property ownership, the OEB, when enacted as law, will create a publicly accessible register of those entities. This will be similar to that found at Companies House listing persons with significant control and will contain information on the entity itself and, crucially, its beneficial owners. The register will generate an ID number which will be shared with the Land Registry to process the registration of property transactions by entities with a verified ID number.
If an entity has not complied with its registration requirements, its ability to deal with property will be restricted. This could delay property transactions and registrations if the register is not up-to-date and, as currently proposed, there will be criminal sanctions for non-compliance by beneficial owners or officers of the entity, or for attempting to make disposals which cannot be registered (although these may be replaced by civil penalties in the first instance).
There have been criticisms that the register will undermine the anonymity and even the security of beneficial owners. A link could quite easily be made between legal and beneficial owners, family members, lenders, and professional trustees – equally, there could be an impact on sensitive trust and matrimonial disputes. However, the gathering public and Government-led interest in having greater transparency on how overseas entities are managed, and what they own, means that those investing in UK property will need to be aware of the proposed legal framework and how those transactions should be structured.
The future of registered land: e-conveyancing, blockchain and cryptocurrency
It is doubtful that any of these proposals will, at first at least, ease the administrative burden on the Land Registry. The Land Registration Act 2002 had in its sights the digitisation of registered conveyancing; the reality nearly twenty years later is still largely a paper-based approach. The Land Registry was able to relax its requirements on the execution of deeds during the COVID-19 pandemic, although the practical solution in many cases is still to obtain wet-ink signatures, especially where there are witnesses involved.
The Land Registry’s Digital Street initiative has looked at blockchain technology and smart contracts as potential solutions to the backlog. However, the promise of blockchain delivering swifter transaction times and greater visibility of each stage of the transaction is yet become a feature of property deals. Perhaps a lack of understanding and, therefore, trust when it comes to blockchain technology has prevented it from taking hold.
The position on the use of cryptocurrency in property transactions is even less certain as, whilst it remains a largely unregulated market, its use appears to run counter to the greater attention being placed on AML procedures and countering fraud. In addition, to register a transfer of land, the applicant needs to produce an SDLT5 certificate to demonstrate that the requisite SDLT return has been submitted and the tax has been paid accordingly. SDLT is payable on the consideration of the property by reference to thresholds expressed in pounds sterling so, even if cryptocurrency is used in the purchase of a property, there will need to be a conversion to market value to ascertain the SDLT to be paid. HMRC has given guidance to this effect but has not given any indication that “money or money’s worth” is likely to be dropped any time soon as the standard for assessing SDLT liability.
If you require further information about anything covered in this briefing, please contact Fred Lee or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2021