Regulations for the Register of Controlling Interests in Land

Scotland's land is some of the most beautiful anywhere in the world, so it’s no surprise investors of all types want to acquire land and buildings in Scotland.

19 July 2018

Scotland's land is some of the most beautiful anywhere in the world, so it’s no surprise investors of all types want to acquire land and buildings in Scotland.

Scottish communities, not surprisingly, also have a keen interest in how the land within their community is used and managed. 

Both these aspirations are laudable and to be encouraged, but sometimes there can be tension between them.

For usually perfectly legitimate and sensible reasons, the ownership of land and buildings can be held in a variety of structures, such as trusts or partnerships, and sometimes involve a complex tier of entities, which can make it extremely difficult to identify who is actually making the decisions about what happens to that land and those buildings. 

This can be particularly relevant to (but not limited to) rural communities, whose neighbourhood may be directly affected by a landowner's proposals or operations, and who want to know with whom they should engage to make representations about decisions that are being made. The person who holds title (and whose identity can be discovered by checking the public property registers) may not, in some structures, be the person who has a say in those decisions: how can you find the right person to speak to?

Often landowners and the local community will engage constructively, and work collaboratively to mutual benefit. Sometimes there will be a factor, a manager, or a managing agent who can be contacted, and a satisfactory dialogue ensues, but that isn’t always the case, and nor does it tackle the issue of lack of transparency about who controls decisions about land in Scotland. 

These are the concerns that underpin the Scottish Government's proposals for a Register of Persons with a controlling interest in land – a key part of its land reform agenda. 

While acknowledging that the devolved competence of Scottish Ministers does not extend to tax matters or anti-money laundering regulation, it is also recognised that greater transparency can also help to address tax fraud and evasion. The UK Government's concurrent proposal for a Register of Beneficial Owners of Overseas Entities is a key component of its anti-corruption strategy. 

The draft Regulations, which will make the proposed Scottish Register a reality, have been published for consultation until 8 November 2018

The Regulations will require owners, and certain types of tenants of land or buildings, to submit to a new Register to be set up for the purpose, details of other persons who exert control over that land, who make decisions, or control the decision-making process about that land.  

These arrangements are not intended to impact on traditional owner-occupier situations where only one person is registered as legal owner of the property, such as the title to a house occupied by a married couple being in the name of one spouse only. 

There is, however, no restriction on the categories of property to which the Regulations apply, so if a home is owned by, say, trustees, it will fall within the ambit of the duties imposed by the Regulations. Bodies that are already subject to some other transparency regime, including LLPs, limited companies subject to the Persons of Significant Control (PSC) Regulations, charitable incorporated organisations, or public authorities, will be also be exempt from the requirements under this new Register. 

A duty to disclose controlling interests
The principal duty will fall on the person who is the owner or the tenant (under a lease of more than 20 years) of land or buildings.  Where, in connection with that ownership or tenancy, there are other people who are in a position actually to control, direct, or significantly influence the activities of the owner or tenant in relation to the land - for example other trustees in a trust, or other partners in a partnership - the owner or tenant must disclose their details to the Register.”

Where there is a person with such control (and there may be more than one), the owner or tenant must submit to the Register details of the property in question, and the names of the persons with control – called "associates" in the Regulations. If the associate is an individual, their contact address and month and year of birth must be provided, and if it is a non-natural person, any registered number and the registered office or other contact address. The disclosure does not necessarily stop there – if the associate is itself an entity which is to be subject to this new regime – broadly trusts, partnerships, unincorporated associations, and overseas entities – then individuals within that entity, for example the partners in a partnership that is an associate of an owner, are also associates. Thus, in a complex multi-tier structure, multiple entries to the Register could be required. The objective would appear to be to get to a human being who calls the shots.

The duty will also apply in situations where the owner or tenant is an individual who owns or leases the land for, or on behalf of, the associate under some contractual or other arrangement (not already covered by one of the other specific entity types – trusts, partnerships, unincorporated associations, and overseas entities – identified in the regulations), and the associate can exercise significant influence or control over the individual's dealings with the land. However, landlords and creditors are not treated as associates in this connection.

If the owner or tenant of the land is one of the exempt type of bodies (because it is already subject to transparency requirements), it need take no action. However, if that body is an associate, its name, registered number and address must still be submitted to the Register by the owner or tenant.

What is significant influence or control?
A person is to be regarded as having control if they are able to direct the activities of another person, such as in relation to the disposal, leasing or changing the use of land or buildings owned by that person, and will have significant influence when they are able to ensure that another person will typically adopt the approach the influencer wants, including having an absolute right to veto decisions in the running of the business. As a general rule this will not apply to relationships with paid professional advisers, creditors, administrators or liquidators, or to any judge in proceedings involving the entity. 

Who has significant influence or control?
As well as persons potentially having control or influence under a contract or other arrangement (not thought to be particularly common), where a property is held by, or on behalf of a partnership, other general partners will be associates, as will partners in another partnership that is an associate, and anyone who has influence or control in another entity (not being in one of the exempt categories) that is a partner; where a property is held by a trustee, then other trustees who do not hold title will be associates; and where a trustee is another entity, such as a body corporate, anyone who has influence or control in that entity (again if not an exempt type) will also be associates.

Where the title is held in the name of an unincorporated association, anyone who is responsible for the general control and management of the administration of the body will be an associate, if they are not also owner or tenant.

The rules for associates of overseas entities adopt a similar approach to the criteria under the PSC regime: a person will be an associate if they hold more than 25% of the voting rights in the overseas entity, or have power to appoint or remove a majority of the board of directors or management body, or otherwise exercise significant influence or control.

Duties, Offences and Penalties
Duties imposed by the Regulations are not to be taken lightly. Such is the importance attached to the purpose of this Register by Scottish Government, that failure to comply with the requirement to disclose will be a criminal offence liable on conviction to a fine of up to £5,000. Similar sanctions apply to other duties – to intimate to the Register when someone ceases to be an associate, or the owner or tenant ceases to be a person to whom the Regulations apply, or any information in the Register changes. 

The owner or tenant must notify the associate that they have given details of the associate to the Register: failure to do so will also be a criminal offence. An associate, if it does not receive such a notice, must itself notify the Register of its association: failure to do so will also be a criminal offence, as will failure to respond to the owner or tenant seeking confirmation of the associate's details.

There is a duty on the executors of an individual who is a relevant owner, tenant, or associate, to notify the Register of the death of that individual. That duty will also attract a criminal penalty if it is not complied with.

The Regulations also introduce a standalone offence of "giving false or misleading information" in any of the documents submitted to the Register or in responding to any request concerning information on the Register, where a person intentionally fails to provide information, or is reckless about whether all material information is disclosed.

The Regulations are a veritable minefield for the unwary or the careless, and it will be incumbent on Scottish Government to see to it that these requirements are well publicised, and that help and support is available, to ensure that offences aren’t committed inadvertently.

Privacy and confidentiality
Some individuals and organisations may be disturbed by this new disclosure requirement, and have concerns about invasion of privacy, or commercial sensitivity. Some might even say that it appears to be directly contradictory to the privacy principles of GDPR (however personal data required to be disclosed by an enactment is GDPR-exempt).  

There is to be no general privacy or confidentiality exemption, but the Regulations will protect the vulnerable who may be at risk of harm if their personal details were to be made public. An associate who is an individual can make a security declaration, supported by appropriate evidence, that the inclusion of their details would put them at risk of violence or abuse, the threat of violence or abuse, or intimidation.

Appropriate evidence may be a court order or interdict made for the protection of the individual, or consist of a statement given by a relevant individual such as a senior police officer, chief social worker or medical practitioner. The Keeper of the Register will decide if the security declaration is adequate, and there is a right of appeal against a finding that it is not.

Timing and transitional arrangements
It has already been decided that the Register will become operational on 1 April 2021. From that date, affected owners and tenants of property will have to comply with the disclosure and other duties. Existing owners and tenants will be affected immediately, and new owners or tenants acquiring or leasing property after commencement will be expected to comply at the time of acquisition. Being prepared in advance of the start date is advisable, however there will be a six month period of grace until October 2021, during which the penalties for failure to comply will not be applied.

Assessing the impact
These duties will impact on a wide range of individuals and bodies, from the local sports club to the large commercial organisation and from small family partnerships to major pension fund trusts. 

It is estimated that around 10% of titles in Scotland are held by "legal entities" i.e. non individuals. The majority of these titles (which equates to approximately 260,000 titles) are believed to be held by bodies that are exempt – UK companies or LLPs. 

Recent research by the Registers of Scotland disclosed that over 1,700 titles in the Land Register are held by overseas companies – although the data available is incomplete – and there is no accurate information about trust or partnership property, so there is no ability to produce a proper estimate of how many properties, or people, are likely to be affected by these requirements.

Some structures are so complex that the actual owner may have no idea who is an associate for the purposes of these regulations, but they must take reasonable steps to establish if there are any associates, and obtain and verify the accuracy of the information they are given.

Whether or not something is partnership property can be a source of argument or uncertainty among the partners, but it seems unlikely that in such cases the duty to disclose would simply not apply.  However, without legal advice or some more formal determination, the owners may be unwilling or unable to resolve the matter either way, and yet the potential of committing an offence looms.

Criminalising people for doing no more than owning or leasing land seems, on one view, disproportionate to say the least, and it is likely that most "offences" under the proposed Regulation will be committed unintentionally, by people with nothing to hide.