New measures to pave the way for large scale institutional investment in the housing sector in Scotland came into force on 31 August 2011. The measures have been introduced by amendments to sections 8 and 11 of the Land Tenure Reform (Scotland) Act 1974. The amendments, which were made by sections 36 and 37 of the Private Rented Housing (Scotland) Act 2011, have become collectively known in the affordable housing sector as the "McLetchie amendment", after David McLetchie, who introduced them at Stage 2 of the passage of the 2011 Act through the Scottish Parliament.

Background

Sections 8 and 11 of the 1974 Act, as enacted, (a) restricted the ability of landlords and tenants to enter into a lease of residential property of more than 20 years and (b) permitted debtors to redeem a standard security over property once 20 years had elapsed, regardless of a longer contractual term, without incurring break costs. One of the main purposes of the 1974 Act was to prohibit the imposition of feuduties (annual ground rents), and sections 8 and 11 were intended to prevent the equivalent of new feuduties being imposed through the use of long residential leaseholds and standard securities. However, an unwelcome consequence of sections 8 and 11 was that the door was closed on a variety of funding models and institutional investors have, as a result, been largely restricted from investing in the provision of new homes for rent. Sections 8 and 11 have become (somewhat unfondly) known in the property industry as the "20 year rule".

The problem was addressed to an extent by sections 138 and 139 of the Housing (Scotland) Act 2010 which came into force on 1 March 2011. The effect of these sections was to (a) disapply section 8 of the 1974 Act in relation to leases to registered social landlords, their connected bodies and rural housing bodies, and (b) in relation to section 11 of the 1974 Act, allow such bodies to renounce their right to redeem a standard security after 20 years. These changes have already resulted in a bond-linked finance transaction involving our client The Housing Finance Corporation Limited and a financing of New Gorbals Housing Association.

Changes to Section 8 of the 1974 Act

New power
The amendments to section 8 which came into force on 31 August give the Scottish Ministers power to prescribe by order other bodies or types of body that are exempt from the restriction on 20 year residential leases. Any type of housing provider (including, for example, a provider of student accommodation) could potentially be the subject of such an order.

Restrictions and conditions
In making an order, the Scottish Ministers may (1) prescribe conditions which a body or type of body must meet, (2) restrict the exemption to specified leases or types of lease, and (3) prescribe circumstances in which the exemption is to apply or cease to apply in relation to a body or type of body or any lease. The Scottish Ministers may also stipulate what is to happen if the conditions or restrictions in any order are breached, and make provision for the protection of the interests of tenants or residents of any dwellinghouse on the property which is subject to a particular lease. The Scottish Ministers also have power to amend the relevant legislation if that is required.

Changes to section 11 of the 1974 Act

New power
The amendments to section 11 give the Scottish Ministers power to make orders allowing other bodies and types of body to gain the ability to renounce their right to redeem a standard security after 20 years. It is envisaged that this right could be useful, for example, if a landlord wished to participate in a long-term fixed interest bond issue which relied on the bond holder retaining security over the underlying housing assets for more than 20 years.

Restrictions and conditions
As was the case for section 8, the Scottish Ministers have the power to set conditions and restrictions which a prescribed body or type of body must meet and Ministers may also restrict the application of the right to renounce to specified heritable securities or heritable securities of specified descriptions.

Conclusion

As explained in a Scottish Government memorandum published with the Bill which preceded the 2011 Act, giving these powers to the Scottish Ministers, rather than legislating directly, is preferable because it offers the most flexible (and potentially quickest) route for recognising bodies which lobby/apply to be permitted to enter into residential leases for periods in excess of 20 years. In the Government's view this is important not only because such bodies are expected to be of very different types - which may range from a single private landlord body, to a class of body such as "public limited companies" - but also because bodies using this provision are unlikely to be subject to the same controls over disposal of assets or assignation of head leases which characterise the social landlord sector. In the words of David McLetchie, it is hoped that the new provisions enable the market to be to opened up to "a wider form of institutional investment, while not prejudicing or imperilling the security and peaceful occupation of property that tenants are entitled to expect."

The extent to which the Scottish Ministers' new powers under the 1974 Act will be used in practice remains to be seen, but we will be monitoring developments with interest.

Contact us

For further information, please contact:

Iain Macniven
Partner, Property
0141 271 5763
iain.macniven@mms.co.uk

Gordon Aitken
Partner, Property
0141 271 5747
gordon.aitken@mms.co.uk

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