New transparency regime affecting property in ScotlandTransitional grace period ends on 1 April 2024
* Last updated 24 January 2024
A new transparency regime affecting property in Scotland came into effect on 1 April 2022. A transitional grace period during which the offence provisions in the underlying regulations are suspended comes to an end on 1 April 2024. From that date breach of the regulations can result in a fine of up to GBP5000.
The Land Reform (Scotland) Act 2016 (Register of Persons Holding a Controlled Interest in Land) Regulations 2021 (the 2021 Regulations) came into force on 1 April 2022.
The policy intention behind the 2021 Regulations is to increase public transparency in relation to persons who have control over decision-making in relation to land in Scotland. (The words “land” and “property” are used interchangeably in this article.)
Subject to some important exemptions and exceptions, the 2021 Regulations oblige owners or tenants (under registered long leases of over 20 years) to enter (in a new public register) information about themselves, the property, and the identity of persons who, though not holding legal title, have power to exercise significant influence or control over what happens to the property.
The new public register is operated by Registers of Scotland (RoS) and is known as the Register of Persons Holding a Controlled Interest in Land (RCI). The 2021 Regulations refer to:
- owners/tenants holding legal title as “recorded persons” and
- persons who do not hold legal title but can exercise significant influence or control over recorded persons’ decision making relating to property as “associates”.
Registers of Scotland have published detailed guidance on RCI. A link to this is provided at the end of this article. Owners or tenants within scope of RCI can set up their own account to enter information in RCI or appoint an agent to do so on their behalf. Guidance on how to set up an RCI account is available on Registers of Scotland’s website at the following link.
The 2021 Regulations are fairly complex and we have summarised below the salient points.
The 2021 Regulations are intended to result in the disclosure (in the RCI) of the identity of persons (ie associates) who have power to exercise significant influence or control over the person (or persons) with legal title in any of the following five scenarios (specified in Parts 1-5 of Schedule 1 of the 2021 Regulations):
- Part 1 (scenario 1): where legal title is held by an individual, and there exists a contractual or other arrangement with another person which gives that person influence or control over significant decisions in relation to the land.
- on whose behalf the recorded person owns or tenants the land (such as in a nominee arrangement),
- who has the right to exercise, or actually exercises, significant influence or control over the recorded person’s dealings with the land.
In this case, an “associate” would be a person:
- Part 2 (scenario 2): where legal title is held by a partnership, or by a person as a partner in a partnership or on its behalf (Note: Limited Liability Partnerships, Scottish Limited Partnerships, and Scottish partnerships where all the partners are limited companies are exempt).
- a general partner of the recorded person, but not registered as owning or leasing the land,
- a general partner of another partnership which is (of itself) a partner of the recorded person,
- an individual who has significant influence or control over a relevant entity (as defined in Schedule 1, part 2, paragraph 5) which is a partner of the recorded person,
- an individual who has the right to exercise, or who actually exercises, significant influence or control over the recorded person or a partnership in which the recorded person is a partner
In this case, an “associate” would be:
- Part 3 (scenario 3): where legal title is held by a person as a trustee of, or otherwise on behalf of, a trust.
In this case, an “associate” would be:
- a trustee of the trust, but not registered as being the owner or tenant of the land,
- an individual who has significant influence or control over a relevant entity (as defined in Schedule 1, part 3, paragraph 8) which is a trustee of the recorded person,
- an individual who has the right to exercise, or who actually exercises, significant influence or control over the recorded person or the trust
- Part 4 (scenario 4): where legal title is held on behalf of an unincorporated association.
- is responsible for the general control and management of the administration of the body, and
- is not registered as owning or leasing the land
In this case, an “associate” would be a person who:
- Part 5 (scenario 5): where legal title is held by an overseas legal entity (Note: Overseas entities which have shares admitted to trading in a regulated market situated in an EEA state or markets listed in Schedule 1 of the Register of People with Significant Control Regulations 2016 (which includes the New York and Tokyo stock exchanges) are exempt.)
- directly or indirectly holds more than 25% of the voting rights in the recorded person,
- directly or indirectly holds the power to appoint or remove a majority of the board of directors of the recorded person (or if it doesn’t have a board, the equivalent management body),
- has the right to exercise, or actually exercises, significant influence or control over a partnership or unincorporated body which is not a legal entity or a trust, but in respect of which head (i) or (ii) would apply if the partnership, body or trust were an individual, or
- otherwise has the right to exercise, or actually exercises, significant influence or control over the decision-making of the recorded person, particularly in respect of its dealings with the land.
In this case, an “associate” would be a person who:
A recorded person/associate relationship may exist under more than one of the above scenarios for an owner or tenant within scope of RCI. In relation to overseas entities, for example, the RoS guidance comments:
“Sometimes an overseas entity will own or tenant land as a trustee or a partnership. In these cases, the overseas entity will require to determine and disclose all of their associates. They may have associates because they are an overseas entity and have associates because they are trust or a partnership. The resulting entry for the recorded person in RCI will not disclose how each associate was determined. Where an overseas entity is acting as a trustee of a trust or as a partner in a partnership, they should register in RCI in the overseas entity category rather than choosing trustee or partner.”
DUTIES UNDER THE REGULATIONS
Recorded persons and associates
The primary duty under the 2021 Regulations falls upon recorded persons. A recorded person is obliged (under regulation 10) to verify with the associate certain required information (including identity and contact details) relating to that associate, and to then enter the relevant information in the RCI. This process has to be completed within 60 days of the event which resulted in the recorded person/associate relationship coming into being. An example of such an event would be the submission of the recorded person’s application to the Land Register to register title, after purchasing the land.
Associates also have duties under the 2021 Regulations. These are set out in regulations 13 and 14, and include providing required information about themselves, if requested (by a recorded person), or on their own initiative (if they haven’t been asked for such information by a recorded person within 67 days of becoming an associate of that recorded person).
Off-register events can result in an obligation to record information in the RCI
A requirement under the 2021 Regulations to record details in the RCI is not only triggered when someone acquires title to land (or a long lease). It can also be triggered by an event which doesn’t change who owns or leases land, but which leads to someone becoming classed as an associate of the registered holder of title.
For example, if an event led to a person directly or indirectly holding more than 25% of the voting rights in a (non-exempt) overseas entity which owns land in Scotland, that would result in a requirement to record information about that person in the RCI, as that person would now be an associate of the overseas entity (i.e. recorded person).
Another example (within the unincorporated associations scenario 4 listed above) might be where title to the clubhouse and courts of a tennis club is held in the name of trustees on the club’s behalf. The trustees would be recorded persons for the purposes of the RCI, and the existing chairperson and treasurer of the governing committee of the club would be classed as associates. If a new chairperson and treasurer were elected to the governing committee, there would then be a duty to record the required information on the new chairperson and treasurer (as associates of the trustees who hold title) in the RCI.
A further example might be where an owner or tenant (within scope of RCI) enters into a contract such as an option agreement, or “missives” (ie. a contract of sale) with a third party. Although the 2021 Regulations and official guidance do not specifically mention such contracts as being in scope, a possible interpretation is that on entering into such a contract, as the owner or tenant is now restricted in its freedom to deal with the land in question, the other party to the contract can be considered to have “significant influence or control” over the owner or tenant’s decision making relating to the land. This would mean that the other party to such a contract would be an “associate” (of the owner or tenant) whose details require to be entered by the owner or tenant in the RCI. Although “missives” are expressly excluded from scope (by virtue of Schedule 1, part 1, paragraph 2(f) of the 2021 Regulations) in relation to scenario 1 (where legal title is held by an individual), the cautious approach (in the absence of any further official guidance on RCI) would be to take the view that option agreements are potentially within scope in that scenario, and that contracts such as missives and option agreements are potentially within scope of RCI in the other scenarios.
The duty to record information in the RCI applies in relation to existing property interests from 1 April 2022
The obligations under the 2021 Regulations to record information in the RCI apply (from 1 April 2022) in relation to existing land ownership and registered leases, and in relation to property interests acquired after that date. Non-exempt categories of property owners (or tenants) should consider whether (in relation to their existing property holdings) there are any parties who could fall within the definition of associates, and if so, enter relevant information in the RCI. They should also consider whether any future transactions relating to relevant property interests trigger a requirement to enter information in the RCI.
Likewise, persons who could fall within the definition of associate by virtue of already having significant control or influence over the decision making of landowners or tenants potentially within scope of RCI, or as a result of future events, should consider whether the 2021 Regulations apply to their circumstances, and if necessary, provide the recorded persons with the information required for the RCI.
Penalties for failure to comply and transitional grace period
A person who fails to comply with the 2021 Regulations without reasonable excuse can be fined up to GBP5000. There is, however (under regulation 26(2) of the 2021 Regulations), a transitional grace period which began on 1 April 2022 during which the offence provisions in the 2021 Regulations are suspended, meaning that failure to comply with the 2021 Regulations will not incur a fine. The transitional grace period was originally due to end on 1 April 2023, but a year's extension of the grace period to 1 April 2024 was announced on 23 January 2023.
EXCEPTIONS AND EXEMPTIONS
The 2021 Regulations include some important exceptions and exemptions. These should kept in mind before giving thought to whether, in any given set of circumstances, a duty might arise to record information in the RCI.
The exemptions (set out in Schedule 2 of the 2021 Regulations) list various types of entity which are already subject to transparency regimes (such as the Persons of Significant Control Register operated by Companies House) and are therefore exempt from being classed as a recorded person under the 2021 Regulations.
If the holder of legal title to a property is exempt from being a recorded person, there can be no obligations (for recorded persons or associates) under the RCI in relation to that property holding. It is, however, still possible for an entity which falls within the exemptions to be an associate of a (non-exempt) recorded person.
Types of entity which are exempt from being recorded persons under the Regulations include UK-registered companies, Limited Liability Partnerships, and Scottish Limited Partnerships.
As mentioned above, certain types of overseas entity are also exempt. These are overseas entities which have shares admitted to trading on a regulated market which is situated in an EEA state, or a market listed in Schedule 1 of the Register of People with Significant Control Regulations 2016 (which includes the New York and Tokyo stock exchanges).
The exceptions (set out in Schedule 1 of the 2021 Regulations for each of the five scenarios mentioned above) are generally based on the nature of the relationship between recorded persons and parties who might (otherwise) be classed as an associate.
Exceptions – paid professional advisors
An exception which is common to all five scenarios is that a person cannot be an associate of a recorded person simply by virtue of being a paid professional advisor to the recorded person. The 2021 Regulations specifically mention solicitors and accountants as falling within the paid professional advisor exception, but another example could be an asset manager of an investment fund. Each situation would have to be considered on its merits but if a professional advisor’s involvement is restricted to giving advice, as opposed to exerting significant control or influence in relation to decision making relating to property, then it is likely that the exception would apply.
Individuals who would otherwise be required to have their details recorded as associates can make a security declaration to the Keeper of the Registers of Scotland under regulation 16 of the 2021 Regulations requesting that their details not to be recorded as an in the RCI for security reasons (e.g. if they would be at risk of violence if their whereabouts is disclosed). If a security declaration is made, the Keeper of the Registers of Scotland must assess the request, but can refuse it. There are appeal provisions under regulation 18.
The RCI’s relationship with the Land Register of Scotland
The RCI and the Land Register of Scotland operate independently of one another. The Keeper of the Registers of Scotland does not require evidence of recording of information in the RCI as a condition of processing an application to register title to property or to register a lease, and failure to comply with the 2021 Regulations does not affect validity of title in the Land Register.
Overseas entities – UK-wide regime
A new regime for registering details of persons who have influence over or control overseas entities with property interests in the UK was introduced under the Economic Crime (Transparency and Enforcement) Act 2022. The Act received Royal Assent on 15 March 2022.
In relation to Scotland, the Act (generally speaking) prevents (with effect from 1 February 2023) the registration (in the Land Register of Scotland) of a disposition, lease, assignation of lease, or standard security granted by an overseas entity (or, with effect from 5 September 2022, the registration of a disposition, lease, or assignation of lease granted to an overseas entity) unless that entity has registered certain specified information in the new Register of Overseas Entities, which became operational on 1 August 2022. At present, overseas entities are within the scope of the UK-wide regime as well as the Scottish RCI regime, although it is thought that overseas entities may, at some point, be removed from the scope of the latter, as the Scottish and UK governments have previously indicated a desire to avoid duplication between the two registers.
For an analysis of what the Economic Crime (Transparency and Enforcement) Act 2022 means for commercial real estate in Scotland please see this article published on our website.
Subject to the exemptions and exceptions mentioned above, the ambit of the 2021 Regulations is potentially very wide and it appears that parties could be brought within their scope as associates inadvertently, particularly as a result of the type of off-register events given as examples above (such as the acquisition of additional voting rights in overseas entities, changing of office bearers in unincorporated associations, or entering into contracts such as missives or option agreements).
Detailed guidance on the RCI is available on the Registers of Scotland website.