Mon 14 Sep 2020

Time for change

The extraordinary times that we find ourselves in have forced change in almost all aspects of our lives. The impact of the coronavirus pandemic has made us all look at things a bit differently and embrace a new way of living. 

Whilst some changes have been hard others have provided us with innovative, better ways of doing things.

Property law in Scotland has seen a number of significant changes in the last two decades - the abolition of the feudal system, the codifying of the common law of title conditions and a new Land Registration Act to name but a few. Despite these changes there remains areas fraught with complexity and uncertainty and laws which are not fit for purpose in the modern business world.

These laws need modernised if we want Scotland to remain an attractive place to invest. As we all embrace the changes forced upon us in this extraordinary year could now be the time to do this and tackle issues long overdue? Our top five wish list is below.

Digital registration

This week the Keeper of the Registers of Scotland announced that more than 80,000 deeds and almost 60,000 advance notices have been submitted for registration via their digital submission service. A year ago this would have been unthinkable. The successful launch of the digital registration system during lockdown proves what can be done. 

Although huge progress has been made and we are now able to submit documents which have been signed in wet ink electronically, it is generally not possible to register a document which is signed digitally. This is the biggest impediment to using electronic signatures in real estate transactions in Scotland.

Whilst the Land Registration etc. (Scotland) Act 2012 paved the way for registration of digital documents further regulations are required before it becomes a reality. In today's climate, with more and more businesses using electronic signatures this needs to be prioritised. It would be unforgivable to lose the present momentum for change and unforgivable not to build on all the invaluable work which Registers of Scotland have done to adapt to the current environment. 

Abolition of the "20 year lease rule"

While the maximum duration for which a new commercial lease in Scotland can be granted is 175 years, legislation (dating back to 1974) contains a statutory restriction which effectively prohibits the grant of leases of private dwelling houses of more than 20 years.

One of the most problematic consequences of this restriction is that a tenant cannot grant a fixed security over their interest in a residential lease as leases of 20 years or less are not capable of being registered in the Land Register. The restriction causes difficulties for developers and investors in residential property particularly where deal structures use long term head lease arrangements to support private residential development finance. 

To encourage investment in affordable housing, the rule was relaxed in 2011 to allow some residential leases (in favour of registered social landlords, their connected bodes and rural housing bodies) to last longer than 20 years.  The Scottish Government revisited the legislation again in 2015 looking at the specific question of whether providers of purpose built student accommodation should be allowed to enter into residential leases for longer than 20 years. Due to other priorities this proposal was not taken forward. Perhaps now is the time to look at this again to encourage private sector investment in modern student accommodation in Scotland. Indeed looking at the bigger picture and beyond just purpose built student accommodation, it is questionable whether a rule, introduced in 1974 as part of the phasing out of the feudal system, is still needed at all.

Registration of options

An option is an agreement that gives one party the option to purchase property within a certain time period (or at a defined point in time) at a pre-agreed price.  Alternatively, there may be a mechanism put in place for determining the price on the date that the option is exercised. 

In Scotland (unlike in England), there is no ability to register an option agreement in the Land Register.  As a result, a Scottish option is a type of personal right (enforceable against the other party to the option agreement) rather than a real right (enforceable against anyone and everyone).  

In practice, this means that if the landowner subsequently sells the property to a third party at a higher price (or grants a lease or standard security over it), your right to exercise the option and purchase the property may not be worth a great deal.

Options are a valuable tool that offer great flexibility in terms of making a particular property deal stack up however the inability to register them causes difficulties. Although the shortcomings can be mitigated to a certain extent, being able to register an option would bring Scotland in line with England and give developers and investors in Scotland the confidence and flexibility to use such arrangements when structuring deals.

Certainty around enforcement of title conditions

Real burdens play a crucial role in regulating management and use of land in Scotland. They are a type of title condition which can impose obligations on owners of residential or commercial property. The obligations may be positive, for example to contribute to the maintenance of common parts in a development or negative for example to refrain from carrying out further building on a property.

Since feudal abolition in 2004, real burdens have been governed by the Title Conditions (Scotland) Act 2003. This Act gave new implied rights to property owners to enforce certain real burdens against neighbouring owners provided that the properties are "related" and subject to a "common scheme".  The provisions are vague, complex and difficult to apply in practice. The result has been additional time spent reviewing titles and uncertainty over whether a real burden affects a property.

In 2019 the Scottish Law Commission published a report recommending the reform of these provisions and draft legislation which seeks to make the law in this area simpler and clearer. It is hoped the draft legislation will be taken forward by the Scottish Parliament soon. Reducing uncertainty over whether and by whom potentially problematic real burdens may be enforceable will have a positive effect on property transactions and will increase investor confidence in Scotland.

Clarity on terminating a lease

In May 2019 the Scottish Law Commission published a discussion paper on aspects of leases dealing, in particular, with the question of termination. As noted in a previous article there are few aspects of Scots law in a bigger mess. The main difficulty surrounds tacit relocation and notices to quit and the complexities of terminating commercial leases in Scotland. 

In Scotland, at common law a lease does not actually end on the specified expiry date unless one of the parties gives timeous notice. The principle of tacit relocation or "silent renewal" means that if notice is not served the lease will automatically continue. It comes as a surprise to many to learn that their assumption that their lease has ended because the end date in the lease has been reached is in fact wrong.

The lack of awareness of tacit relocation and uncertainty about the length and form of notice required to prevent tacit relocation operating has been the subject of both judicial and academic criticism. Whilst the recent judgement in M7 Real Estate Investments Partners VI Industrial Propco Ltd v Amazon UK Services Ltd provided some clarification, uncertainty in this area will not be fully resolved without legislation. In a modern commercial world the concept of tacit relocation isn't really fit for purpose and the lack of clarity on notices to quit needs action.

Could now be the time to grasp the mood for change and use it as an incentive to tackle these issues  and modernise Scots property law making Scotland a more attractive place to invest?

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