September 2012 – R.I.P. Ultra-Long Leases

Author: Mitchells Roberton
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LONG LEASES (SCOTLAND) ACT 2012

 

  • Generally, one tends to think of leases as having a term of six months or perhaps a year or two for residential leases; five or fifteen years for modern agricultural leases; and, say, 25 years for commercial leases.
  • Nevertheless, in Scotland, there are quite a number of leases for very much longer. Paisley seems to be the epicentre for such things and can boast (if that term be apt) 11 leases granted for a million years. Unsurprisingly, so optimistic a length of time as a million years is at the extreme end of the spectrum. But there are a significant number of leases for 999 years.
  • As can readily be appreciated a tenant under a lease for that sort of length of time is, in practice, in a similar position as an owner of the property. Yet, strictly speaking, in law he or she is not an owner but a tenant.
  • In 2006 the Scottish Law Commission published a Report on the Conversion of Long Leases (Scot Law Com 204). That Report recommended that there should be a scheme for converting ultra-long leases so that the tenant would become owner of the property – unless the tenant opted out of the scheme.
  • That Report resulted in the Long Leases (Scotland) Act 2012 which received Royal Assent on 7th August this year. Most of the Act is not yet in force: it will not be so until such day as the Scottish Ministers may appoint. In anticipation of that day being appointed this Note says something about:

(1)          terminology: leases and ultra-long leases;

(2)          some reasons for the introduction of a new scheme for the conversion of ultra-long leases; and

(3)          the effect of the scheme.

(1)          Terminology: long leases and ultra-long leases

 

  • A “long lease” usually means a lease with an initial term of at least 20 years. A lease must exceed 20 years if it is to be registered in the official property registers (i.e. the quaintly named  “Register of Sasines” or the “Land Register”). And it must be so registered if it is going to give the tenant a “real right” as tenant: in other words a right as tenant which is still effectual if the original landlord sells on to someone else.
  • Since 1974 residential leases cannot be for an initial term of more than 20 years. So, such leases cannot be registered in the official registers. For residential leases (and other leases of 20 years or less) a “real right” is conferred on the tenant by virtue of the tenant’s actually taking “possession” of the property. That will (generally) be enough to give such a tenant a right which is still effectual if the original landlord sells on.
  • The way an “ultra-long lease” is defined for the purposes of the 2012 Act is a lease which was granted for more than 175 years and still has more than 100 years to run.
  • Since 2000 it has no longer been possible to grant any type of lease for more than 175 years.

 

(2)         Some reasons for the introduction of the new scheme for ultra-long leases

 

  • Ultra-long leases suffer from various disadvantages:

(i)            they tend to beget subleases which can become needlessly complex;

(ii)           they may be vulnerable to the landlord terminating them without the tenant’s consent for a breach of the terms of the lease – such as non-payment of rent;

(iii)          they may allow for an inappropriate degree of control by the landlord in relation to things like permitted uses of the property; and

(iv)         they may allow a landlord to extract a payment from the tenant in exchange for the landlord’s not insisting on particular conditions in the lease.

  • Just as important perhaps as those practical reasons is the fact that ownership of land in Scotland was, until 2000, largely “feudal”: in other words land tenure was, essentially, hierarchical. That was swept away by the Abolition of Feudal Tenure (Scotland) Act 2000 which provided:

“The feudal system of land tenure… is…abolished… land shall…cease to exist as a feudal estate but shall forthwith become the ownership of the land…”

 

  • For many home owners that provision may have had no practical impact. But it was revolutionary in property law terms. Functionally, ultra-long leases operate in a similar way to the old system of “feudal tenure”. So, consistently with the abolition of “feudal tenure” of land,  it makes sense to provide for the abolition of ultra-long leases.

(3)          The effect of the scheme

 

  • The scheme is automatic: tenants do not have to do anything. But they have the right to opt out of the scheme and remain tenants.
  • On conversion the tenant becomes owner.
  • The conditions in the lease are extinguished but with some exceptions. For example, conditions concerned with maintenance and use of common facilities or the provision of services survive, and there would be scope for the landlord to preserve certain conditions for the benefit of neighbouring land.
  • The landlord is entitled to compensation calculated as a multiplier of the rent. An edited version of the statutory provisions for calculating the amount of compensation is as follows:

Calculate the sum of money which would, if invested in 2.5 per cent Consolidated Stock at the middle market price at the close of business last preceding the appointed day, produce an annual sum equal to AI where AI = (the annual rent  + the notional annual renewal premium (if any)).

 

  • Such calculations only begin to make real sense with an actual practical example. But, in most cases, the amount of compensation payable will be small – and a tenant who was not willing to pay could opt out.

Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Alison Gourley: ajg@mitchells-roberton.co.uk

 

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