Controlling interests: problem questions

Since CPD conferences and seminars on the Land Registration etc (Scotland) Act 2012 started in earnest a couple of years ago, two recurring themes that have arisen from the audience as their main areas of difficulty have been the one-shot rule and how to avoid rejections, and how to comply most efficiently with the statutory duty of care without having to raise fees.

A land reform consultation now current in relation to the proposed new register of controlling interests in land will be directly relevant to these issues, as well as raising further potential questions for solicitors. This article gives an overview of the consultation and how the new register could affect conveyancing and land registration.

General questions

Section 39 of the Land Reform (Scotland) Act 2016 allows ministers to make regulations to provide for the disclosure and publication of information on controlling interests in landowners and tenants. The related consultation is available online at bit.ly/LandReformConsultation2016

There are some general questions about whether a new register should be created or whether the information should just form part of the Land Register; whether the register should be public; and what anti-avoidance measures can be introduced.

One of the main reasons behind the new register is transparency, so as to allow communities and others to know more about who controls land in Scotland. To some extent that is nothing new, as real rights generally require some kind of publicity to become real, whether by registration or open prescriptive use.

Transparency in the sense of the new register goes further, because it is not just a question of identifying owners and tenants, but also any parties influencing them. Increased information about land is also one of the drivers behind ScotLIS and recent changes to information that companies must provide to Companies House (see below). The key point for conveyancers is that more information than is currently checked for property transactions may be needed in future – more even than anti-money laundering checks would require.

The consultation says that it is desirable to keep the regulations proportionate and not unduly onerous, and queries whether the nature and extent of a person’s controlling interest could be commercially sensitive; whether there should be exemptions; potential impacts on privacy and the environment; whether respondents foresee any potential costs and burdens arising; and any impact on regulation for any sector.

If the legal profession believes that advising clients on, or identifying and preparing, information for the new register would impact on clients’ legal costs or solicitors’ written-off costs, this is the opportunity to make that known.

Triggers for registration

What land should be subject to the new requirements? “Land” will probably be the same as for the Land Register. So, it would cover not just land previously registrable under the 1979 Act, but also the seabed that can now be registered.

As to when information would have to be provided, this may not just be triggered by land registrable transactions. The regulations may apply to sasine and pre-sasine land, short but valuable leases, and personal rights in land. The duty might apply when a person becomes a person with a controlling interest, which could be at the point of a short lease being entered into, a trust being set up, or a building owned individually being added to a partnership’s asset register without being formally conveyed. Additionally there may be an obligation to provide information as soon as the regulations come into force. There is also discussion about whether the information should be kept up to date, so conceivably there could be obligations to submit information periodically.

Parties/interests to be disclosed

The register will not just be about identifying owners and tenants. The Land Register and Sasine Register already do that, for the most part. It is about finding out who has the controlling interest. To borrow a phrase, it is about “lifting the veil”, though not just in corporate situations.

Indeed the consultation gives the examples of land owned individually but used in practice as a partnership asset, trust relationships, and liferents. Companies and LLPs potentially also have controlling interests, though that information should largely be obtainable from Companies House. Other “secret” relationships are also being considered, with a view to anti-avoidance.

The definition of “persons with controlling interests in landowners and tenants” (PCIs) will be central to the register and what requirements have to be met. The consultation asks for responses. The Government sees the two main elements being who has control of decision-making, and who has the financial benefit and risk of the land.

There is some suggestion that the definition could mirror that applying to companies’ annual returns (now known as annual confirmation statements) under the Small Business, Enterprise and Employment Act 2015, amending the Companies Act 2006. Since 6 April 2016, UK companies have had to tell Companies House annually who their “persons with significant control” (PSCs) are. It is expected that further controls will be added for non-UK companies too.

There are various ways in which a person can be a PSC. Mostly these are possible to work out factually without taking a legal view, albeit the exercise is more usual for corporate lawyers than property lawyers. For example, a person may be a PSC if they have more than 25% of the shares or voting rights. Some of the criteria are vaguer, such as whether the person has a right directly or indirectly to appoint or remove a majority of the board, or the right to exercise (or does exercise) “significant influence or control” over the company. There are different criteria for trusts and partnerships.

The definition of “beneficial ownership” in the Money Laundering Regulations 2007 is also considered as a potential starting point, albeit there are some similarities with the PSC definition. The anti-money laundering criteria may be perceived as a lesser burden for conveyancers, who already understand and have to comply with those. However, the point is made that aligning the new definition with PSCs could prevent double reporting, i.e. having to report to Companies House and also to the Keeper.

Views are therefore sought on using these as precedents for this register.

Information to be disclosed

Other questions ask what information should be disclosed. Names are a given, but for PSCs, for example, full addresses, the nature and extent of their controlling interest and so on are also included. Whether this would be sensitive information, commercially or otherwise, or raise privacy concerns is also queried.

Presumably the land would have to be identified, but there is no specific mention of how this should be done, for instance whether sasine land would have new mapping requirements or whether identifying existing descriptive writs would suffice.

Effect on Land Register applications

From April to June 2016, approximately 22% of first registrations were rejected. Over and above the immediate financial hit to RoS and lawyers, clients themselves are vulnerable to competing registrations, insolvencies and so on until their deed is actually registered. The fact that the original date of registration is lost when an application is rejected means that all the historic issues around the “race to the register” are amplified, particularly as advance notices only give protection for a 35 day period whereas rejections can occur much later.

Against this background, it is no real surprise that rejections are one of the key risks for law firms and clients, and remain one of the hot topics at conferences and seminars.

It is therefore of critical importance that the profession carefully consider the impact of these proposed regulations on conveyancing transactions.

Some suggestions in the consultation are that, if controlling interest information is not provided to the Keeper, or it is not certified that no such controlling interest exists:

• the relevant land registration application should be rejected; or
• land registration can proceed but a note will be put on the title sheet, which may have the effect of being a legal charge preventing resale until it is paid.

Although not mentioned in the consultation, it is interesting to note the penalties on companies that fail to provide PSC information annually to Companies House. Ultimately they could be struck off, but that would not happen before notification and a chance to remedy the omission. This is more akin to the Keeper’s requisition practice under the 1979 Act than the one-shot rejection practice under the 2012 Act system. Whatever the effect on land registration of the controlling interests information, it is to be hoped that it will not further increase the number of rejections.

Duty of care/criminal liability

There may be a new statutory duty to take all reasonable care to ensure that the PCI information is provided. It is not clear who the duty would be owed to. If it were the Keeper, it could overlap with the existing 2012 Act duty to take reasonable care not to make the Land Register wrong. If, as seems more likely, it will be a separate register, there could be two separate statutory duties of care in relation to what may in effect be one application.

Criminal liability, in the form of a fine rather than imprisonment, is also being considered. Interestingly, the example used is the 2012 Act, though it would be surprising and worrying if a mere land registration error ever resulted in a criminal sanction.

We are also asked who should have these duties and liabilities. The person with controlling interest, the owner and the tenant are in some respects the obvious candidates. However, there are concerns that it may be difficult for an owner or tenant to identify, or for authorities to enforce against, the controlling person, perhaps because of a complex corporate structure or foreign residency.

It is suggested in the consultation that “intermediate persons” may have the relevant information, and should therefore have statutory duties and civil and/or criminal liability. Such intermediaries include solicitors and accountants. Again this is in contrast to Companies House submissions of PSC information, which has no such duty on solicitors.

There will be a separate workstream on sanctions and enforcement, and anyone with particular interest in that aspect is encouraged to take part.

Respond in time

The consultation closes on 5 December 2016. Given the publicity and strong opinions on land reform, it is possible that many interested parties will respond. Once finalised, the new obligations are likely to impact daily on land registration applications, solicitors’ statutory duties of care and criminal sanctions, and the costs to clients and firms of conveyancing transactions. It is therefore important that property solicitors read, consider and respond to this consultation so that any concerns are taken into account.