In a recent decision the Court of Justice has addressed a question that fundamentally affects landlords who lease property to commercial companies – are they subject to obligations relating to money laundering and terrorist financing? This would mean a fairly substantial increase in the administration associated with such services – and those who have not yet complied would also face sanctions.

Circumstances of the dispute

The dispute concerned a Latvian real estate trading and rental company. Tenants included legal entities and legal arrangements that used the address of the leased premises as their registered office address in the public register. As a result of this fact, the Latvian State Tax Administration concluded during the audit of the company that the company performed the activity of a “provider of services related to the establishment and functioning of legal arrangements or legal entities” and was therefore an obliged entity under the Money Laundering Prevention Act.

The status of an obliged person is linked by Latvian law to certain specific obligations, which the company did not fulfil and was therefore fined EUR 1,000. However, the fined company disagreed with this conclusion and argued that it did not provide any special services to the tenants and that the lease agreements only stipulated the tenants’ right to register their registered office in the leased property in the public register.

Scope of application of the Directive

The Latvian Money Laundering Prevention Act is an implementation of Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing (“the Directive”). Article 2 of the Directive lists the entities, to which the provisions of the Directive apply by virtue of their involvement in carrying out a transaction or activity of a financial nature. These entities include providers of trust services or services to commercial companies.

According to the Directive, a service provider to a business company is, inter alia, any person who, as an entrepreneur, provides a third party[1] with a registered office, a company address, a delivery or administrative address and other related services. The Directive does not define the concept of related services, nor does it contain an exemplary list. The Court therefore had to decide if an arrangement in a lease agreement which allows the tenant – a trading company – to register its registered office as the address of the property constitutes the provision of a registered office under the Directive.

In its reasoning, the Court first states that the object of the lease is the landlord’s obligation to make the property available to the tenant. In the Czech legal system, the issue of lease is regulated by Section 2201 of the Civil Code, which provides that in a lease agreement, the lessor undertakes to give the lessee a thing for temporary use and the lessee undertakes to pay rent to the lessor. It is necessary to distinguish from this contractual relationship the service of providing a registered office, which by its nature does not require entering into a lease agreement, but on the contrary will usually include, for example, the service of receiving, registering and possibly forwarding incoming mail addressed to the company.

Moreover, the legislator’s intention to include landlords in the list of obliged persons, either generally or subject to other conditions, cannot be inferred, as it does not include them in the list in Article 2(1) of the Directive.

Conclusions of the Court of Justice

Accordingly, the Court concludes that the mere making available of immovable property (i.e. entering into a lease agreement) does not constitute the provision of trust or company services within the meaning of the Directive, even where the landlord grants the tenant consent to locating its registered office in the property.

However, the Directive only represents a harmonisation framework, which sets a minimum standard of regulation that leaves room for Member States’ laws to regulate money laundering and terrorist financing in a stricter way. According to Article 4(1), Member States have the right (and obligation) to ensure, in accordance with the principles of the Directive, that its scope extends to other professions and categories of undertakings not included in the list of obliged persons, if they carry out activities where there is a high likelihood of money laundering or terrorist financing.

However, the Latvian legislation has implemented the provisions of the Directive in a rather minimalist manner and has not extended its scope in any way, therefore it cannot be concluded that the obligations set out in the Directive should also apply to landlords who allow tenants to register their registered office there.

Practical implications of the Court's decisions

The above decision thus makes it clear that landlords who have given their tenants consent to locate their headquarters in their property are not automatically subject to the obligations set out in the Directive. On the other hand, the provider of the “virtual registered office” is an obliged person, because the use of the premises does not actually take place there and in most cases this service involves at least receiving and forwarding mail.

[1] Such third party in the context of the Directive means a company, partnership or other legal entity or arrangement.