After a somewhat chequered history, the Long Leases (Scotland) Act 2012 has finally been passed. The Act will automatically convert a tenant’s interest in an ultra-long lease (those let for more than 175 years) to ownership.
Reasons for the change
The Act is part of the Scottish Government’s' programme to simplify the land tenure system in Scotland. The main reason for the change is that a lease which is granted for more than 175 years effectively amounts to transfer of ownership to the tenant. Stewart Stevenson, Scotland’s Environment Minister said “Ultra-long leases are so long that the tenant is, in effect, the owner in all but name”. In most ultra-long lease cases, landlords have minimal to no real interest in the land and therefore it is inappropriate for them to exercise any control over it. According to the Scottish Government, around 9,000 leases will be eligible to convert into ownership under the Act.
- An eligible ultra-long lease is one that was let for more than 175 years and, on the appointed day, has more than 175 years left to run in the case of non-residential leases, or, if a residential lease, has more than 100 years to run.
- Current indications are that the appointed day will be 28 November 2015.
- The conversion will be automatic for all eligible leases, however the tenant is entitled to opt out.
- The landlord will be entitled to compensation which will be calculated as a multiplier of the rent. There will be certain cases where additional compensation will also be due, e.g. for loss of non-monetary rents, loss of right to a rent review increase or loss of development value. In order to claim compensation, the landlord must serve a notice on the former tenant with an explanatory note, all in specified terms, not later than two years after the appointed day. •If the compensation is more than £50, the tenant must be offered the option to pay by instalments. There is a cap of £500 on the total compensation that may be claimed. However, this cap will not apply if the landlord serves a notice on the tenant more than six months prior to the appointed day stating an intention to claim for a higher amount than £500.
- There is an optional opt out for the tenant. It is anticipated that a tenant may do this where there is a high amount of compensation payable to the landlord. There is no option to opt out on the part of the landlord.
Certain leases are excluded under the Act:
- The annual rent payable under the lease is over £100. This exemption is designed to exclude leases of property on commercial terms, and landlords must register a notice to that effect to qualify for the exemption.
- The premises let include a harbour in relation to which there is a harbour authority;
- Leases, the sole purpose of which is to allow the tenant to install and maintain pipes or cables;
- Mineral leases and leases which include mineral rights.
What this means for landlords, tenants and legal practitioners
Although it is more than two years until eligible ultra-long leases are converted into ownership, the provisions have potentially huge implications and it is vital that landlords and tenants are aware of how the Act may affect them.
The first step of course is to establish if your lease qualifies as an ultra-long lease. Tenants should consider whether opting out of the regime might be justifiable considering the likelihood of paying compensation. Similarly, landlords should be careful to ensure that they receive the compensation that they are entitled to for the loss of their right to the land. Particular provisions such as the time periods for claiming compensation and preserving commercial leases, and the cap should be borne in mind by landlords and their advisors.
The next step for the Scottish Government is to concentrate on providing information on the changes to landlords, tenants and their advisors particularly in areas such as Alva, Ardrossan, Blairgowrie, Saltcoats, Stevenson and Wishaw where ultra-long leases are common.
To view the Long Leases (Scotland) Act 2012, click here.