This note affects landlords and tenants in long leases of commercial, land and rural, and residential property. It also affects transactions where long leases were granted before 2000 as an alternative to outright sale in order to protect the seller’s right to claim industrial buildings allowances.

In Scotland, many commercial, rural and residential properties are held on very long leases. Since 2000, the maximum term for which a lease can be granted is 175 years, but there are many 999 year leases currently in existence.

The Scottish Parliament has published a consultation draft of the Long Leases (Scotland) Bill. If this becomes law, it will automatically convert the tenant’s interest in “long leases” of property to outright ownership, and will deprive the landlord (present owner) of his ownership right, in exchange for payment of compensation. The tenant will be able to opt out of the automatic conversion. The new law will not apply to leases of minerals. Sporting rights that are reserved in favour of a landlord will be able to be preserved.

Long Leases

A “long lease” is a registered or recorded lease that was granted for longer than 175 years where more than 100 years are still to run immediately before the day when the law comes into effect – this day is called the “Appointed Day”.  In calculating the term of a lease, any option to terminate the lease early is ignored, but where there is an obligation on the landlord to renew the lease, this is to be taken into account. Where a new lease is granted before the end of the original term, the term of the new lease is added.

There would be a two year notice period before the “Appointed Day” is set. 

On the Appointed Day the tenant’s right in the lease would become a right of ownership, and the landlord’s ownership would be extinguished. Rent is payable until the Appointed Day. Any standard security (mortgage) affecting the landlord’s ownership interest would also be extinguished. Any standard security affecting the tenant’s interest would become a charge over the tenant’s ownership.

Provided certain conditions that will be set out in the new law are met, the following will be converted into title conditions affecting the tenant’s ownership title: (a) rights granted to the tenant and rights of access etc reserved in favour of the landlord or to owners of nearby properties, (b) obligations to do something including payment of money, apart from rent, and (c) right to enter or use the property. If the conditions are not met, the landlord can apply to the Lands Tribunal for Scotland for a conversion order.

A landlord who is entitled to a right of pre-emption or to take back the property would be able to preserve their right by registering an appropriate notice before the Appointed Day.

Compensation

The landlord will be able to claim compensation for the loss of his rights as owner and landlord, and this will mainly be in respect of loss of rent income. If the lease requires the landlord to renew or extend the term in exchange for payment by the tenant of a lump sum, then compensation will also be available for that.

The landlord will also be able to claim compensation in some cases for (a) loss of right to get back the property, if there are still more than 200 years of the term left to run after the Appointed Day, and (b) loss of right to enforce non-monetary obligations.

In order to claim compensation, the landlord would have to serve on the former tenant a notice with an explanatory note, all in specified terms, no later than two years after the Appointed Day. If the compensation is more than £50, the landlord must offer the tenant the option to pay by instalments.  The compensation for loss of rent and payment for extension or renewal of the lease lump sum will be in the form of a single payment. This will be the amount that would produce the same income as that which has been lost, if that amount were invested at close of business immediately before the Appointed Day in 2.5% Consolidated Stock (a UK Government investment) at the middle market price.

Opting-out

Only the tenant will be allowed to opt out of the new law, and thus retain his leasehold interest; he would have to sign and register a notice no later than 2 months before the Appointed Day. Presumably a tenant would only want to opt-out in order to avoid having to pay compensation to the landlord.  The landlord is not allowed to opt out of the new law. There will be a facility for the tenant to cancel his opt-out notice.

Anti-avoidance

In order that landlords do not try to terminate the lease on the grounds of breach of tenant obligations, the new law would prohibit, from a date to be specified, the termination of a “long lease” by irritancy (forfeiture), even if termination proceedings have been commenced at that time.

Industrial Buildings Allowances

Until 2000, many leases were granted for periods considerably longer than 175 years as an alternative to outright sale, in order to protect the seller’s entitlement to Industrial Buildings Allowances, and to allow the seller to have stronger rights to enforce obligations affecting the property. Industrial Buildings Allowances (“IBA’s”) are available to the owner of a qualifying property 25 years after the date of expenditure, and therefore, if a seller granted a “long lease”, and if the 25 year period for the IBA is to expire after the Appointed Day, the tenant will become entitled to claim the IBA, and the landlord would not be entitled to any compensation for the loss of the IBA.

Further Information

For further information on the issues raised in this ezine, please contact:-
Ken Gerber or Gavin Thain (Commercial Property)

John Mitchell or Jim Drysdale (Land Resources and Rural Property)

Robin Stimpson (Residential Property).

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.