17 Sep 2014

Long Leases (Scotland) Act 2012

Long Leases (Scotland) Act 2012

Richard Street, Partner, comments on the upcoming implementation of the Long Leases (Scotland) Act 2012.

Richard Street, Partner, comments on the upcoming implementation of the Long Leases (Scotland) Act 2012.

Why buy when you can rent for 175 years?  An interesting question, but one which the Scottish Parliament has decided to make obsolete.

As of 28th November 2015 ‘qualifying leases’ will automatically convert the tenant’s interest to ownership, as mentioned by the client under the Long Leases (Scotland) Act 2012.

Qualifying Leases

To qualify a lease must be:

  • Registered/recorded
  • Originally have been granted for a term of more than 15 years
  • Have more than 175 years of the term left to run if non-residential; 100 years left if residential
  • Have an annual rent of £100 or less
  • Not be a lease of a harbour where there is a harbour authority
  • Not be a lease of minerals
  • Not be a lease granted for the sole purpose of installing and maintaining pipes/cables

Exempt Leases

The Act will not force tenants out, indeed they stand to benefit greatly from the act. Tenants can choose to opt out of the legislation, but landlords cannot. Landlords, by contrast, will need to register an agreement with the tenant for their long lease to be exempt. The onus will be on landlords to ensure any long leases are exempt, or that any overdue rent is recovered before 28/11/2015, as recovery will not be possible afterwards.

Compensation for Landlords

It is not all bad news for landlords. Compensation may be payable by the tenants for loss of rent and other rights (set out in part 4 of the Act). The explanatory notes accompanying the  Act state that the “compensation is designed to deliver the same economic benefit to the landlord as the ongoing income from rent paid under the ultra-long lease being converted to ownership. Additional payments may also be due.” As a result landlords may lose out in capital, but should be no worse off for income. It is important to point out that landlords only have two years in which to register a claim for compensation.

Impact on Lenders

For lenders any standard security over the tenant’s interest in a long lease will remain intact. This, however, will not be the case for any standard securities given by the landlord against the property. Lenders may be able to recover sums due early as per their security agreements, but will not be able to call up against the security after the relevant date in 2015. Repossession would no longer be an option. It would be advisable for lenders to discuss their options as soon as possible with landlords holding long leases.

Lease Conditions to Title Conditions

The law obviously has to protect neighbouring properties which benefitted from existing lease conditions. Where necessary certain lease conditions will automatically convert into title conditions affecting the tenant’s new interest in the property for the benefit of neighbouring properties.  Other conditions may convert to title conditions on registration of a notice by the person/group entitled to enforce the condition.

Long leases are relatively rare in Scotland, it is estimated there are around 9000 in the country that will be eligible to convert. This number is quite low by comparison to the rest of the UK as a result of the feudal system and the long existing possibility of horizontal division of property north of the border. Nonetheless those 9000 instances could wake up to a nasty surprise on 29th November next year if they have not already taken action.

Richard Street, Partner

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