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Eversheds Global Estate Management

UK Scotland

Real Estate Guide

Principles of ownership

Principles of ownership

Freehold/Ownership - whilst one may hear mention of ‘feuhold’ tenure in Scottish property transactions, this form of tenure was abolished in 2004. The Scottish equivalent of freehold property is often referred to as ‘heritable property’ (or, more simply, the property is ‘owned’) and may be sold with vacant possession or subject to tenancy rights.

A landowner may acquire servitude rights over other land akin to English easements. Generally for such rights to be fully and properly constituted they must be registered in the Land Register of Scotland against the title of both the benefitting and the affected properties. Servitudes can also be created by open unchallenged use for 20 years or more without written or registered reference.

Land is commonly subject to burdens enforceable by other landowners (similar to restrictive covenants in England). If these impede development or use of the land in any way they can be discharged but that will generally be done by negotiation or by application to the Lands Tribunal for Scotland. In either event, payment will be involved. The result will be a grant of discharge of title condition which would be registered against the title to the property.

Distinct from England, it is possible for heritable property to be subject to positive obligations (real burdens) that binds successors in title without the need for specific deeds of covenant to be entered into by each successive owner.

Leasehold - leasing in Scotland is for the most part free from legislative regulation and the Landlord and Tenant legislation of England and Wales does not apply, although there are limited forms of statutory security of tenure for leases of shops and there is statutory regulation of the circumstances in which a landlord is able to irritate (forfeit) a lease. Leases of residential property cannot be granted for any period in excess of twenty years and other leases cannot be for a period greater than 175 years.

Rural land is subject to greater legislative control than urban leases. Agricultural tenancies are an area of some complexity and speciality. An important feature of Scottish leases is the process for bringing them to an end.

Leases in Scotland continue to run indefinitely after the expiry of their initial contractual term until either the Landlord or the Tenant takes a positive step to terminate the lease, typically the service of notice. If the property is of an area greater than two acres then not less than one year’s notice in writing is required to terminate the lease. For smaller areas the period is not less than forty days. These notice periods cannot be reduced by lease drafting (although it is of course possible for the Landlord and the Tenant to agree to terminate the lease early). If notice is not served on time by either the Landlord or the Tenant, then the lease runs on for a further year and so on until appropriate notice is served. This is known as ‘tacit relocation’ (‘silently re-letting’).

Common hold/Usufruct - not applicable.

Condominium ownership - not applicable.

Utilisation right - not applicable.

Joint/Co-ownership - not applicable.

Registration - there are two registers in Scotland, the General Register of Sasines and the Land Register of Scotland. The two registers operate concurrently but Land Register of Scotland is gradually replacing the General Register of Sasines and new sales of land trigger first registration of a title registered in the General Register of Sasines in the Land Register. Some transactions, such as the grant of a first ranking standard security (the Scottish equivalent of a first legal mortgage) do not trigger first registration. Until title is registered no ownership passes is and the interest of purchaser is not secure against competition from third parties. There is no concept in Scots Law of equitable title or beneficial interest and a buyer is therefore at risk of a seller becoming insolvent or selling the property to a third party ahead of any registration of title. In the absence of a priority period 'freezing' the register as in England, this risk is usually covered by the lawyers of the seller giving their own undertaking (a letter of obligation) to the lawyers for the purchaser that there will be no competing title or encumbrance registered before the title the buyer is registered. Time limits are applied in this practice. Similar to the English Land Registry, Scottish title registration is a plan based system with the benefit of Government guarantee/indemnity of title applying to all successfully completed registrations. The Land Register records demonstrate ownership, extent of property, any fixed charges affecting the property and the burdens that apply. There may also be unregistered 'overriding interests' which encompass unregistered servitudes, public rights of way and unregistered leases. Leases of less duration than 20 years cannot be registered in the Land Register. Leases of more duration than 20 years are registered in the Land Register under their own title and also noted against the landlord's title (if that title is registered).

 

Restrictions on foreign ownership

Restrictions on foreign ownership

There are no restrictions on foreign ownership of Scottish real estate. There are no restrictions or restraints on the repatriation of income or proceeds from property as such but non-UK resident landlords will suffer the withholding of income tax from the payment of rents.

 

Title to real estate

Title to real estate

Investigation of title - lawyers for the purchaser will undertake the examination of title and other due diligence material. Observations or queries on title and other relevant material are raised and to be answered to the satisfaction of the purchaser.

There is no set form of enquiries before contract in Scotland in the same fashion as in England but the process is becoming more standardised amongst lawyers engaged in this line of work.

Transfer of title - a completion of a sale, the seller will deliver a disposition (a 'transfer') to the purchaser, together with a letter of obligation. The purchaser will then apply to register the disposition at the Land Register within the period set out in the letter of obligation (usually not more than 14 days). Until a conveyance has been registered in the appropriate register, the buyer does not get a good title. A buyer is therefore at risk of the seller selling the property to a third party who then registers title before the buyer is able to register his/her title. These potential risks are usually covered by the lawyers of the seller giving their own personal undertaking (a letter of obligation) to the lawyers of the buyer that there will be no competing title, or encumbrance, registered before the title of the buyer is registered. If a competing title is registered and a claim is made against the lawyers of the seller, they will usually be covered by professional indemnity insurance. It often comes as a surprise, to those unfamiliar with the Scottish system, that, pending registration, the lawyers of the seller effectively act as guarantors for the title of their client.

Registration - there are two registers in Scotland, the General Register of Sasines and the Land Register of Scotland. The two registers operate concurrently but Land Register of Scotland is gradually replacing the General Register of Sasines and new sales of land trigger first registration of a title registered in the General Register of Sasines in the Land Register. Some transactions, such as the grant of a first ranking standard security (the Scottish equivalent of a first legal mortgage) do not trigger first registration. Until title is registered no ownership passes is and the interest of purchaser is not secure against competition from third parties. There is no concept in Scots Law of equitable title or beneficial interest and a buyer is therefore at risk of a seller becoming insolvent or selling the property to a third party ahead of any registration of title. In the absence of a priority period 'freezing' the register as in England, this risk is usually covered by the lawyers of the seller giving their own undertaking (a letter of obligation) to the lawyers for the purchaser that there will be no competing title or encumbrance registered before the title the buyer is registered. Time limits are applied in this practice. Similar to the English Land Registry, Scottish title registration is a plan based system with the benefit of Government guarantee/indemnity of title applying to all successfully completed registrations. The Land Register records demonstrate ownership, extent of property, any fixed charges affecting the property and the burdens that apply. There may also be unregistered 'overriding interests' which encompass unregistered servitudes, public rights of way and unregistered leases. Leases of less duration than 20 years cannot be registered in the Land Register. Leases of more duration than 20 years are registered in the Land Register under their own title and also noted against the landlord's title (if that title is registered).

Information on register - see "Registration above"

Commercial leases - will usually provide that the consent of the landlord is required for a sublease or assignation (the Scottish equivalents of the English terms underlease and assignment) of the whole. Again, there is no implied duty for the landlord to act reasonably, so the tenant will want to ensure that such consent is not to be unreasonably withheld or delayed. Alienation of part only of the property is generally prohibited.

 

Structure of a real estate transaction

Structure of a real estate transaction

Negotiation of terms/Agreement - commercial terms are usually agreed by agents for parties to a deal. Heads of terms arising from these negotiations are then passed to solicitors for the respective parties to negotiate and document the detail of the arrangement.

Investigation of title - lawyers for the purchaser will undertake the examination of title and other due diligence material. Observations or queries on title and other relevant material are raised and to be answered to the satisfaction of the purchaser. There is no set form of enquiries before contract in Scotland in the same fashion as in England but the process is becoming more standardised amongst lawyers engaged in this line of work.

Purchase deed - not applicable.

Contracts - contracts for the sale and purchase of property or the entering into of leases are normally constituted by an offer issued by one party’s lawyer which in turn is accepted by the lawyer for the other party. These letters known as ‘missives’ are signed by the lawyers on behalf of their clients and once a bargain is concluded in this fashion it is as binding on the principals as if they had signed on their own behalf. Missives may be adjusted ahead of conclusion in draft or, more rarely in commercial practice, may comprise an exchange and build up of letters, with consecutive letters varying terms set out in preceding letters. In the process of sale of commercial property it is not generally the practice to provide for or require a deposit at the time of concluding the contract. On settlement of the purchase and sale transaction the purchaser pays the price and in exchange receives the disposition and other title deeds and is given entry to the property. After completion the purchaser’s solicitor will attend to the completion of the SDLT process and registration of the title on behalf of his client.

Completion/closing - not applicable.

Post completion - not applicable.

Leases - commercial leases, if for an initial term of more than twenty years, must be registered in the Land Register. Otherwise they are commonly registered in the Books of Council and Session, a public register which preserves the original documents and issues ‘extracts’ of them (i.e. full bound photocopies). With this registration process, if the lease contains a consent to preservation and execution then the Landlord has the power to exercise ‘summary diligence’ by use of the extract lease from the register, speeding substantially the entry to court process in the event of requiring to enforce any terms of the lease.

Commercial leases in Scotland are substantially similar in terms to their English equivalent documents although they are also required to address the need to contract out of the common law provisions which would otherwise apply. The most significant of these common law terms is that it would be for a landlord to keep property in a wind and watertight condition unless expressly stated that this is not to be the case.

Transfer of ownership leased property (alienation) -

Alienation: landlord’s consent - commercial leases will usually provide that the landlord’s consent is required for a ‘sublease’ or ‘assignation’ (the Scottish equivalents of the English terms ‘underlease’ and ‘assignment’) of the whole. Again, there is no implied duty for the landlord to act reasonably, so the tenant will want to ensure that such consent is not to be unreasonably withheld or delayed. Alienation of part only of the property is generally prohibited.

Alienation: subleases - a subtenant in Scotland is in a more precarious position than in England. Subtenants should generally seek an ‘irritancy (forfeiture) protection agreement’ to ensure that, if the head lease is forfeited, the subtenant can take a direct lease from the head landlord. In the absence of such an agreement, the subtenant has no right to apply to the court for relief on forfeiture of the head lease.

Alienation: assignation - the standard position in Scotland is that there is no privity of contract, and an assignor ceases to have any liability under a lease with effect from the date of entry under an assignation. This has always been the case in Scotland and was unaffected by the Landlord and Tenant (Covenants) Act 1995 in England.

It has always been possible to contract out of this and to provide in a lease for an original or successor tenant being jointly and severally liable with other successor tenants. However, it is very unusual for such a provision to be agreed to by a tenant and, where it is, it will only be enforced by the courts where there is clear and unambiguous language.

 

Usual commercial lease terms

Usual commercial lease terms

Summary of available lease types - not applicable.

Alterations/modifications - commercial leases usually provide that the landlord’s consent is required for alterations. There is no implied duty for the landlord to act reasonably. Normally, however, a tenant tries to provide in the lease that the consent is not to be unreasonably withheld or delayed. Assignment and sub/under letting - not applicable.

Destruction/reinstatement - as opposed to England, at common law if the leased premises are destroyed through no fault of either party, at common law the lease will automatically terminate (the principle of ‘rei interitus’). A commercial lease in Scotland will generally expressly exclude this common law principle. It is normal practice to supplant this common law rule with a provision that the lease will continue in the event of destruction. This is subject to the qualification that, if the premises have not been reinstated (by the landlord or tenant depending on who is obliged to do so under the lease) after a given period (usually three to five years), either party may terminate the lease, assuming both parties have acted reasonably.

Duration of lease - the recent trend for new commercial leases has been for terms of between five or fifteen years with a break option (i.e. option to determine) after five and/or ten years.

Forfeiture/irritancy - in Scotland, irritancy (forfeiture) is the right of a landlord to terminate the lease if there is a breach by the tenant. This is construed very strictly and will be enforced by the courts. There is a statutory right of relief under which the tenant has a right to time in which to pay any money that is unpaid or to remedy a non-monetary breach (such as carry out a repair).

Insurance - compensation for improvements. At lease termination, a tenant has no statutory right to compensation for goodwill or any improvements made to the premises during the currency of the lease. The landlord generally insures (particularly in multi-occupancy buildings or where there are common parts), with the tenant obliged to pay the premiums (or a share of them) on demand. It is common for public liability insurance and plate glass insurance to be the tenant's responsibility. Commercial leases often provide that, in the event of a building being destroyed by an insured risk, the landlord is obliged to rebuild with the insurance monies, giving the tenants a rent abatement until the premises are rebuilt or until the insurance period (usually three years) has expired. In addition, there needs to be negotiation when entering into the lease as to what happens in the event of uninsured damage (such as terrorism).

Keep open - "Keep open’" clauses are enforced in Scotland. Retail tenants should bear in mind the prospect of being obliged to keep open Scottish properties, particularly where these are in shopping centres and the landlord is more likely to obtain a keep open court order. In 2007, the first award of damages was made by a Scottish court for breach of a keep open clause. In Scotland a landlord must elect either to seek a remedy of damages or specific implement (the Scottish equivalent of specific performance - i.e. an order to do the thing you had contracted to do). Once that election is made there is no right to go back to the other remedy.

Rent deposit/bank guarantee - this is uncommon.

Rent review - the frequency of review will vary depending on location, but the interval is typically five years for longer leases. The standard practice is for rent review provisions to provide only for upwards-only rent review. It is understood, however, that the industry bodies responsible for promoting the voluntary Commercial Lease Code, launched in England and Wales in March 2007 (which encourages landlords to offer upwards/downwards rent reviews to reflect market rent) wish to have it extended to Scotland.

Repair/decoration/furnishing - at common law, a landlord is obliged to keep premises reasonably fit for the purposes for which they are let, and in a wind and watertight condition. The majority of commercial leases contract out of this and normally provide full obligations on the tenant to put and keep the premises in good and tenantable repair.

Service charge - commercial leases commonly contain a service charge clause under which the landlord charges the tenant for carrying out maintenance and repair of the fabric and structure and common parts the building, and providing services such as heating, lighting, cleaning and security. The tenant will attempt to exclude a number of services from the provision, including costs of repairing damage caused by insured risks, and costs of repairing damage caused by latent or inherent defects.

Tenant’s duties - not applicable.

Termination/break clauses - in longer commercial leases, it is common to include break clauses for both landlord and tenant. A tenant's break clause will typically be conditional on the tenant having materially performed its obligations under the lease up to the break date.

 

Increasing covenant strength

Increasing covenant strength

Lease deposit - the landlord may insist that a rental deposit agreement is entered into to govern the deposit and management of a rental deposit (frequently equal to six months rent) from the tenant, to be held and used only in accordance with the agreement. A rental deposit is a weaker version of a full guarantee (see Surety below) but will probably be required for similar reasons, i.e. the landlord not being fully comfortable with the tenant's covenant.

Surety - the landlord may require a surety (or guarantee) from a third party guarantor, guaranteeing the obligations of a tenant and indemnifying the landlord against any breach by the tenant. A guarantee of this sort will often be requested where the landlord is unsure about a tenant’s covenant strength, where the tenant is a relatively new company with a group or holding company, or where the landlord is in a strong negotiating position.

Warranty - not applicable.

Rent deposit/bank guarantee - this is not common.

 

Security of tenure

Security of tenure

Apart from the Tenancy of Shops Acts 1949 and 1964, which give limited security of tenure to tenants of shops, tenants of commercial property have no statutory security of tenure. There is no entitlement for the tenants to apply to the court to have the lease extended. The lease comes to an end on the contractually agreed date after due notice (called notice to quit) has been given by one party to the other. Minimum periods of notice (to be given by each party before the lease termination date) are prescribed by statute, and in most cases the period will be 40 days. If the notice to quit is not duly given, a lease for over a year will continue from year to year on exactly the same terms, until terminated by due notice (this is known as tacit relocation), and a lease for less than a year is automatically renewed for the original duration.

 

Taxes

Taxes

The same system of property taxation (which includes VAT, stamp duty land tax and income tax) applies to the whole of the United Kingdom (see the section on UK - England and Wales).