Whether you rent a shop in a small market town or an entire office building in London, you never know who your Landlord will be next year, and you could end up with an overseas Landlord. Further, many Landlords are not based in the United Kingdom. Property is a much more international business then many people realise and that demands awareness of how to handle the special legal problems which arise when Landlords are not based in the United Kingdom and how they may cause considerable burdens for Tenants. Here are 4 such issues:
1. The Register of Overseas Entities
The Economic Crime (Transparency and Enforcement) Act 2022 established a Register of Overseas Entities whereby the following must register at Companies House as an Overseas Entity here:
- A body corporate, partnership or other entity that (i) is a legal person under the law by which it is governed and (ii) is governed by the law of a country or territory outside the United Kingdom.
- That (i) owns or has owned a “Qualifying Estate” in the UK since 1 January 1999, or (ii) wishes to acquire one.
- A Qualifying Estate is a freehold, or a lease of more than 7 years.
While an Overseas Entity/overseas Landlord is unregistered, it will not be able to dispose of the freehold, grant a lease of more than 7 years, or secure a loan against the property.
A few interesting points come out of this:
- Overseas Entities include entities based in the Channel Islands and the Isle of Man because those countries are Crown Dependencies, but are not part of the United Kingdom.
- The rules do not apply to private individuals who are not based in United Kingdom.
- The rules apply to both Landlords and Tenants.
- A freehold transfer or a lease with a term of over 7 years should be registered at HM Land Registry in order to become a legal interest.
- An easement in a lease of less than 7 years should also be registered at HM Land Registry in order to become a legal interest.
It means that a Tenant which has agreed and signed a lease of more than 7 years and has moved into the property and started paying rent, the Tenant will not be able to register the lease and give it proper legal effect if the Landlord should be on the register but is not. Even if the Landlord is on the register but has not updated the information on the register, the Landlord will still not be considered as registered and the Tenant will have the same problem.
It is important in any property transaction to check the status of all the parties:
- For Tenants: do not complete the lease until the Landlord is registered. This may require careful planning at the outset to prevent getting caught out by having a gap between exiting the current premises and entering the new premises or by missing any other important deadline.
- For Landlords (especially a buyer is acquiring the Landlord’s interest in a building): if a Tenant is an overseas entity but is not on the register or the Landlord is on the register but has not updated the information on the register, it will very likely be a sign of problems to come and could affect the value of the Landlord’s property as well as the ability to finance it.
- For Landlords: if a Tenant’s guarantor is an unregistered overseas entity, if may make it much harder to oblige it to take over the lease.
- In any situation which involves the transfer of a lease, which could include banks enforcing security, liquidations and corporate acquisitions, it will also be important to check that the registration status of the outgoing Tenant will not prevent the transfer from being registered at the Land Registry.
If an overseas landlord is not registered, this could result in criminal liability, so anyone should be very wary of dealing with an overseas entity that is not yet registered.
2. The non-resident Landlords scheme
Payments of rental income to overseas Landlords are subject to a withholding tax under the non-resident Landlords scheme set out in the Taxation of Income from Land (Non-residents) Regulations 1995 (SI 1995/2902). This includes residents of the Channel Islands and the Isle of Man because they are not part of the United Kingdom.
If the Tenant pays the rent directly to a Landlord not based in the United Kingdom (and not to a UK agent acting on behalf of the Landlord), the Tenant must not pay the whole of the rent to the Landlord but instead deduct from it an amount for the Landlord’s tax liability and the Tenant must pay it directly to HMRC.
The non-resident Landlord should then make a UK tax return mentioning the amounts withheld and if appropriate claim a refund from HMRC.
3. Service of some sensitive notices are very tricky
Many legal notices served abroad are subject to rules laid down by law, for example the Hague Convention and the Civil Procedure Rules. However, property is different. Whereas for some notices served pursuant to a lease, it will be sufficient to prove actual service, for other notices for example a notice to exercise a right of early termination, the notice must strictly comply with the terms of the lease – to the extent that if the lease requires service on the Landlord’s place of business in the UK, a notice which is served on the Landlord’s registered office may be invalid. However, in some cases it may be extremely difficult to ascertain where the Landlord entity’s place of business in the UK is.
The lease should give careful thought to how a notice is served on an overseas party. Out of a standard 50-page lease, this apparently innocuous clause is frequently overlooked but it is important for what happens in the ongoing operation of the Landlord-Tenant relationship. If this clause is not correct, then a party starting a claim might need to:
- Comply with local and international rules on service in the receiving party’s country. These rules vary and may make service slower, harder to achieve and considerably more expensive; and/or
- Apply to court for permission to serve the claim on that party.
4. Signing the documents
Who can sign on behalf of a company, is determined by the law of the country where the company is registered. It will be irrelevant that the property is in the United Kingdom and the lease is under the law of England & Wales.
How the signature is made must:
- Comply with a specific form of signature allowed by the Land Registry, or
- Comply with the law of the country where the overseas company is registered but, in this case, it will be necessary to have a local lawyer confirm in writing that the manner of execution used is effective according to the law of the territory of incorporation.
- If the overseas company uses a power of attorney and that power of attorney is done under English law, it must be executed as a deed and the Landlord will need to provide a certified copy of it.
- However, if the overseas company is using a power of attorney governed by the law of another jurisdiction, the applicant must send the Land Registry the following extra documents:
- a certified copy of the power; and
- it may also require an apostille under the Hague Convention. In some countries that is sent by the notary to a government department but in other countries the notary must make a court application, which can add significant time to a transaction. The apostille ensures that public documents issued in one signatory country will be recognized as valid in another signatory country, or
- if the overseas company is in a country which has NOT joined the Hague Convention, its authenticity must be legalized (sometimes by a government department or sometimes a notary); and
- a legal opinion from a lawyer qualified to practice in that territory confirming:
- execution by an attorney is permitted by the laws of the jurisdiction in which the overseas company is incorporated;
- the company has the legal capacity to appoint an attorney;
- the overseas company has complied with any formalities governing the appointment of an attorney in the jurisdiction of its incorporation and is bound by the power of attorney;
- the power authorised the donee to execute the relevant document on behalf of the donor;
- the power remained valid at the time of execution; and
- any legal opinion must not be qualified or conditional.
- if the power of attorney is granted under the law of a third country (i.e. neither the country where the overseas company is registered nor England and Wales), that may require two legal opinions: one from a lawyer in the country where it is granted and one from a lawyer in the country where the company is registered; and
- a certified or notarised translation of any document which is not in English or Welsh.
In some countries, there exists company officers with a status which does not exist in England & Wales, for example the status of Prokurist which is common in Germany and Austria. In this case, a rather more careful handling of the matter is required which is likely to involve discussions between the English lawyer and the foreign lawyer.
As mentioned before, a commercial property lease is a very flexible document which manages many risks and it is only kept simple when the lawyer deeply understands what is going on. Experience of working with foreign jurisdictions and what is possible to achieve in accordance with both jurisdictions is invaluable and may save many weeks of delay in getting this done.
At EM Law, we have deep expertise in commercial property and we routinely deal with cross-border matters. If you are a tenant or a foreign landlord and you have any queries around your obligations, please do not hesitate to get in touch with James Williamson or contact us here.