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Long Leases (Scotland) Act 2012

The Long Leases (Scotland) Bill was passed on 28 June 2012 and will become the Long Leases (Scotland) Act 2012 ("the Act") on Royal Assent, which is expected shortly.

Key features of the Act are summarised below:

Overview
The Act will convert "qualifying" long leases into tenants' ownership. For the purposes of the Act, "qualifying" leases are leases that (1) were let for over 175 years; (2) in the case of residential leases, have over 100 years left to run from the "appointed day" laid down under the Act; and (3) in the case of non-residential leases, have over 175 years left to run from the appointed day. In calculating the period for which a lease was granted, break options are disregarded, and landlords' obligations to renew are included.

The "appointed day" hasn't been fixed yet but the Scottish Government has indicated that it is likely to be 28 November 2015.

Qualifying Leases
In addition to the criteria above, a lease is only a "qualifying lease" if: (1) it is registered in the Sasines or Land Register; (2) the annual rent does not exceed £100; (3) it does not include a harbour in relation to which there is a harbour authority; (4) it was not granted for the sole purpose of allowing the tenant to install and maintain pipes or cables; and (5) it is not a lease of minerals or a lease containing minerals in respect of which a royalty, lordship or other payment of rent determined by reference to the exploitation of those minerals is or may be payable.

Sub-leases
If land has been sublet, the intention of the Act is that ownership of the land would be acquired by the tenant under the "lowest" sub-lease in the chain which meets the criteria for conversion. If a sublease affects only part of the land originally leased, conversion would apply to this part and the head lease would be the qualifying lease for the remaining part. For example, if X, the owner of land, had leased 5 hectares to Y for 225 years and Y in turn had sublet 2 of these hectares to Z for 200 years, Z would be the "qualifying" tenant in relation to the 2 hectares and Y would be the "qualifying" tenant in relation to the remaining 3 hectares.

Tenants' opt out
Tenants will be able to opt out of conversion of their leasehold interest to ownership by registering a notice of exemption not later than 2 months before the appointed day. This may be an attractive option for a tenant if the landlord's obligations under the lease are such that it is more advantageous to the tenant for the leasehold arrangements to continue.

Landlords' compensation provisions
Landlords will be able to claim, up to 2 years after the appointed day, compensation from tenants for loss of ownership. Compensation will be based on the capitalised value of the rent and will usually be a minimal amount, subject to a general cap of £500. There is provision for landlords to claim an "additional payment" for loss of a right, such as a right to development value under the lease, but in order to claim more than £500 by way of compensatory or additional payment, the landlord must serve notice on the tenant at least 6 months before the appointed day reserving its right to do so.

Exemptions for certain leases with variable rents
Landlords will be able to exempt leases from conversion to ownership by registering, not later than 2 months before the appointed day, an agreement with the tenant, or (following an application to the Lands Tribunal) an order of the Lands Tribunal that the annual rent was over £100 at any point in the 5 years before Royal Assent of the Bill, or will be over £100 immediately before the appointed day.

Preservation of sporting rights
Landlords will be able to register a notice before the appointed day preserving their rights of game and fishing where such rights are reserved (whether expressly or implication) to them under the lease.

Conversion of leasehold conditions to real burdens
Landlords will be able to convert certain leasehold conditions (including use restrictions, and conditions for the benefit of salmon fishings) into real burdens in favour of neighbouring land (and, in the case of pre-emptions and redemptions, in favour of the landlord in a personal capacity) by registering a notice to that effect prior to the appointed day.

Some leasehold conditions (such as conditions relating to management and maintenance of shared property and services, conditions imposed in the same or similar terms on groups of neighbouring properties, and rights of access) will be preserved automatically and become real burdens or servitudes on the appointed day.

The Act contains provisions allowing the Scottish Ministers, Local Authorities (and in some cases other public bodies, and trusts) to convert (into real burdens in their favour) leasehold conditions which were imposed for purposes such as promoting economic development, promoting the provision of facilities for healthcare, promoting conservation, and reducing greenhouse gas emissions.

Click here to view useful explanatory notes to the Bill, published on the Scottish Parliament's website on 20 June 2012.

Development ransom strips - whether public
road extended from "fence to fence"

Introduction
Morston Whitecross Ltd ("Morston"), a property developer, went to court for a declarator regarding the extent of the A801 single carriageway public road at Whitecross (near Linlithgow, West Lothian) at a location between the Union Canal and the main Edinburgh to Glasgow railway line. Morston wished to obtain vehicular access to the public road at this point in order to serve a development owned by them to the east. Morston argued that the public road extended from the fence line to the west of the carriageway to the fence line to the east of the carriageway and thus included a substantial piece of ground (including an embankment) of around 40 feet in width ("the strip") lying between the carriageway barriers and the development land.

If their argument was correct, Morston would be able to gain access to the public road without the need to negotiate a "ransom" payment for crossing the strip. However, Falkirk Council ("the Council") argued that to the east of the carriageway the public road did not extend as far as the fence line, and the strip was private land owned by them. The Council did, however, accept that if the strip was part of the public road at the outset, there had been no de-listing and nothing had happened since then to alter its status.

Background
In the late 1960s, the then roads authority had decided to construct a single carriageway A801, with sufficient embankment width at the location in question to allow for the possibility of the construction of a second carriageway. As a result, a larger area than would normally be needed was acquired by the Council and the wide embankment to the east was constructed.

Key issue
The key issue before the court was whether the public road extended across the whole of the works comprising the carriageway and adjacent ground "from fence line to fence line", including the full width of the embankment, the embankment slope and the berm (i.e. the area of land between the fence and the toe of the slope) to the east of the carriageway.

The decision
Although Lord Malcolm acknowledged that both parties could mount "powerful arguments" in support of their respective positions, he ruled in favour of the Council.

Reasoning
Lord Malcolm stated that each case must be decided on its merits, and in cases such as these earlier decisions of the court are of limited assistance, other than pointing to the kind of considerations and features which might be relevant. The question to be resolved was whether the strip had been "dedicated to public passage".  In Lord Malcom's opinion, there was no fixed, or even general, rule that a public road extended from fence to fence, and the location of the fence lines was not conclusive. Lord Malcolm acknowledged that there may be instances where extended areas to the side of a carriageway would be considered to form part of the road, and referred, as an example, to the Pitlochry by-pass on the A9 where very wide verges were required on sweeping corners for sight lines to enable the safe use of the carriageway. However, the section of the A801 in the present case didn't share similar features to the Pitlochry by-pass. Lord Malcolm noted that the strip had, since the A801 opened, served no function other than to facilitate a possible future second carriageway which had never been built. Although a small parking area had since been constructed on part of it to improve access to the Union Canal, the Council and Morston were in agreement that this did not alter the status of the strip. The matter, in Lord Malcolm's view, should be tested by the use, character and function of the strip at the time when the A801 was first adopted and opened in the early 1970s, not by future intentions, and at no time had the strip been put to use as a highway, or as part of a highway.

Comment
This case highlights once again the need for developers and their professional advisers to pay particular attention to potential ransom strips when undertaking their due diligence as part of a site acquisition. If the matter becomes contentious at a later date any resultant litigation can be both time consuming and costly to resolve.

Click here to view the full judgement.

Consultation on Scottish replacement for SDLT

By virtue of the Scotland Act 2012, the UK's stamp duty land tax (SDLT) will cease to apply in Scotland from April 2015 and will be replaced by a new devolved tax on transactions involving interests in land. In June 2012, the Scottish Government issued a consultation paper - entitled "Taking forward a Scottish Land and Buildings Transaction Tax" - outlining their thinking on the new Land and Buildings Transaction Tax (LBTT).

Click here to view the consultation paper.

The consultation period runs for 3 months from June to August 2012. The Scottish Government then envisages that a Land and Buildings Transaction Tax (Scotland) Bill will be introduced to the Scottish Parliament in autumn 2012 for Parliamentary scrutiny and enactment in summer 2013.

In his foreword to the consultation paper, John Swinney MSP (Cabinet Secretary for Finance, Employment and Sustainable Growth) comments that:

"We believe this is a first and significant step on a journey towards much greater financial self-determination for Scotland. Getting the first step right, and so helping to set the tone for future development of Scotland's public finances, is vital."

Proper consultation will be key to the aim of getting this right, and so this article considers the main features of the proposed LBTT per the consultation paper and areas on which comments are sought.

Overview
As with SDLT, the LBTT would apply to the acquisition of relevant interests in land (both residential and non-residential), including buying, leasing and taking other interests. The proposals contemplate building the new LBTT on the foundations of SDLT, with appropriate modifications and improvements, rather than starting again from scratch in the design of the new tax. The LBTT should be distinctly Scottish, with Scots Law and practices embedded in the governing legislation. The consultation paper acknowledges that there is a choice to be made as to whether the new LBTT should be revenue neutral or should seek to raise more or less revenue. However the Scottish Government reserves its position on tax rates, thresholds and the scale of revenues to be collected, which will be set in accordance with economic circumstances when the new tax is introduced in April 2015.

Structure
The 'slab' approach is a distinctive feature of the current SDLT, i.e. once the price exceeds a particular threshold, the whole price (and not just the excess over that threshold) is taxed at the relevant rate. The Scottish Government's view is that the new LBTT should instead operate on a progressive basis, such that sharp changes in tax liabilities at the thresholds would be avoided and liabilities would increase more proportionately. Comments are sought on this point and also whether the LBTT should be designed to support key priorities of the Scottish Government (and, if so, what those priorities should be and how this could be achieved).

Exemptions and Reliefs
Most of the SDLT exemptions and reliefs would remain. The Scottish Government proposes to expand Compulsory Purchase Order relief for all cases where the local authority transfers the land to a third party, rather than only where this will facilitate development. That would enable local authorities to obtain relief on compulsory purchases of empty homes for onward sale. SDLT's right to buy and shared ownership reliefs would not be included on the basis that they are not required in Scotland.

Commercial and Residential Leases
There is a proposal to exempt residential leases of 20 years or less on the basis that revenues from residential leases are low and will become even lower with the introduction of the Long Leases (Scotland) Act 2012 (which converts long leases into ownership interests in some cases). Currently, to the extent that the chargeable consideration comprises rent, SDLT is calculated on the basis of the net present value of future rental income, and it can be necessary to revisit the calculation in future, for example when the level of rent is uncertain at the outset. The consultation paper includes an open-ended request for proposals on how to ensure that the calculation of tax payments on commercial leases is better aligned with Scots law and practices.

Anti-avoidance measures
The proposals involve putting in place targeted anti-avoidance rules in keeping with those currently applicable to SDLT and also considering the introduction of a general anti-avoidance rule (GAAR) to cover the LBTT and other Scottish taxes. There will be further consultation on the proposal for a GAAR later in the year in a separate consultation on tax management issues.

Administering the tax
As with SDLT, the LBTT would be a self assessment tax and there would be a link to registration of title. The Scottish Government will establish a new body, Revenue Scotland, to oversee the tax administration of devolved taxes. Revenue Scotland would then work with the Registers of Scotland to administer and collect the LBTT. Greater use of online systems would be encouraged and there is a proposal to design a new online system for simultaneous submission of the LBTT return, payment of the tax and registration of title. As with SDLT, taxpayers would have up to 30 days after the 'effective date' to submit the return and pay the tax. However, to secure prompt payment and maximise administrative efficiency, the Scottish Government proposes that registration (in the Land Register, Register of Sasines or Books of Council and Session, as appropriate) would not be possible until both a complete LBTT return has been submitted and any tax due has been paid.

Companies, Trusts and Partnerships
An open-ended request is made for proposals on how to better align the treatment of Partnerships and Trusts (which are complex areas of the existing SDLT legislation) with Scots Law and practices.

Responses to the consultation should be submitted by 30 August 2012 and details on how to respond are provided in the consultation paper. The Scottish Government has held events to explain their proposals in Edinburgh, Aberdeen and Perth and a further event is to be held in Glasgow on 13 August, details of which can be found on the Scottish Government website.

Click here for the Scottish Government website.

OFT gives go ahead for applications to remove land use restrictions
that limit competition against supermarkets

Further to our story in our February 2010 Update that the Government was removing the competition law exemption for land agreements the OFT has announced that from 1 July 2012 businesses will be able to apply to the OFT to remove land use restrictions preventing grocery retailing which benefit the seven major grocery retailers: Tesco plc, J Sainsbury plc, Wm Morrison Supermarkets plc, Asda Stores plc, Co-operative Group Limited, Waitrose Limited and Marks and Spencer plc ("Large Grocery Retailers").

The OFT's announcement was made (on 20 June 2012) under the Groceries Market Investigation (Controlled Land) Order 2010 (the 'Order'). The Order followed an OFT report on the effects of land use restrictions in the grocery market, as well as an investigation by the Competition Commission in 2008. Both authorities found that restrictive covenants (known as "real burdens" in Scotland) and exclusivity arrangements could reduce local competition between rival grocery outlets.

The new measure is designed to help consumers benefit from increased local competition. The Order requires Large Grocery Retailers who benefit from relevant land use restrictions affecting any land in the area surrounding their store to use their best endeavours to release them. The process for businesses to challenge such restrictions will involve the OFT testing the extent of grocery competition in a given local area when an application is made. Crucially, the date that the restriction was imposed will determine whether the OFT can process the application. If a restriction was entered into on or before 10 August 2010 and it restricts grocery retailing or has an equivalent effect, the OFT will not apply the test.

Click here for more information on the OFT's website.

Contact us

If you think your business may be affected by any of the above, or if you have any other questions, please contact Alan Stewart, Stephen Dodds (specifically in relation to the Scottish land transactions tax article) or Michael Dean (specifically in relation to the competition law article).

Alan Stewart
Partner, Property
0131 228 7284
alan.stewart@mms.co.uk

Michael Dean
Partner, EU, Competition and Regulatory
0141 271 5730
michael.dean@mms.co.uk

Stephen Dodds
Associate, Tax
0141 271 5772
stephen.dodds@mms.co.uk

This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.